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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000 or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 000-27389
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INTERWOVEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0523543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 West Fremont Avenue, Suite 2000, Sunnyvale, CA 94087
(Address of principal executive offices)
(408) 774-2000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value;
Registered on the NASDAQ National Market
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 21, 2001 was approximately $3,387,169,543 (based on the
last reported sale price of $38.0625 on January 31, 2001 on the NASDAQ Stock
Market).
The number of shares of Common Stock outstanding as of March 21, 2001 was
102,859,056.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Reference
-------- -------------------
Proxy Statement for Registrant's 2001 Annual Part III, Items 10-13
Meeting of Stockholders to be held on May 31, 2001.
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The Exhibit Index may be found at page 39 Page 1 of 64 pages
INTERWOVEN, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 12
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters........................................................ 14
Item 6. Selected Financial Data........................................ 15
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations.......................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 33
Item 8. Financial Statements and Supplementary Data.................... 34
Changes in and Disagreements With Accountants on Accounting and
Item 9. Financial Disclosure........................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant............. 37
Item 11. Executive Compensation......................................... 38
Security Ownership of Certain Beneficial Owners and
Item 12. Management..................................................... 38
Item 13. Certain Relationships and Related Transactions................. 38
PART IV
Exhibits, Consolidated Financial Statement Schedules and
Item 14. Reports on Form 8-K............................................ 39
Exhibit Index.................................................. 39
Signatures..................................................... 42
Financial Statements........................................... 43
2
PART I
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. For example, we make statements of our expectations
about future financial performance, the growth of our business and trends in
our business. These forward-looking statements involve a number of risks and
uncertainties, including those identified in the section of this report
entitled "Factors Affecting Future Results," which could cause actual results
to differ from those discussed in the forward-looking statements. Forward-
looking statements in this report are identified by words such as "believes,"
"anticipates," "expects," "intends," "may," "will" and similar expressions. In
addition, any statements which refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. We undertake no obligation to release publicly the results of any
revisions to these forward-looking statements that could occur after the filing
of this report. You are urged to review carefully our various disclosures, in
this report and our other reports filed with the SEC, that attempt to advise
you of the risks and factors that may affect our business.
ITEM 1. BUSINESS
Overview
Interwoven provides software products and services that help businesses and
other organizations manage the content of their web sites. In the Internet
industry this is often referred to as "web content management." Our flagship
software product, TeamSite, is designed to help customers develop, maintain and
extend large web sites that are essential to their businesses. TeamSite
incorporates widely accepted Internet industry standards and is designed with
an open architecture that allows it to support a wide variety of web authoring
tools and web application servers. Using TeamSite, our customers can manage web
content, control the versions of their web sites, manage web site contribution
and content approval processes, and develop eBusiness applications. TeamSite
allows large numbers of contributors across an enterprise to add web content in
a carefully-managed process. In addition to TeamSite, our other products
include OpenDeploy, Metafinder and Metatagger.
Interwoven was incorporated in California in 1995 and reincorporated in
Delaware in 1999. We released our first product, TeamSite, in 1997, followed by
OpenDeploy in 1998 and other products in 2000.
Products and Services
Our product line consists of TeamSite, which is our web content management
product, OpenDeploy, which is our web content replication and syndication
product, and other products, such as Metafinder and Metatagger. TeamSite has
additional modules or editions constituting separate products: TeamSite
Templating, TeamSite Front-Office 4.5, TeamSite Turbo, TeamSite Global Report
Center, TeamSite Workflow Builder and TeamSite B2B Edition 4.5.1. We generally
license our products on a per-server and per-user basis and occasionally
license them on an enterprise or site license basis. We also provide services,
including professional services, maintenance and support.
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The following table highlights the features of our products:
Product Description Features
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TeamSite 4.5 . allows multiple developers and contributors
Server-based content management to add content to a web site
software . interoperates with leading web authoring
tools and web application servers
. allows direct edits to web site content
through a browser interface, with
SmartContext Editing
. supports simultaneous eBusiness application
development and deployment
. offers real-time testing capability and
sophisticated workflow processes
. offers comprehensive file versioning and
whole-site versioning
. upgradable with optional software modules
and editions
Software Modules and Editions . streamlines enterprise-wide deployment of
TeamSite Turbo web properties by connecting TeamSite with
Deployment integration software leading application servers
. provides standard set of integration points
such as applications, personalization rules
and targeting rules, to manage dynamic web
content
TeamSite Templating . allows content contribution using standard
Server-based content templating templates and through web browsers
software . promotes participation from non-technical
contributors
TeamSite Global Report Center . allows administrators to monitor system
Reporting and auditing software activity
. delivers sophisticated reporting and
auditing functionality
. optional software module licensed with
TeamSite
TeamSite Front-Office 4.5 . allows for the creation and publishing of
Content publishing and creation content to TeamSite directly from Microsoft
software Office applications or Microsoft Explorer
TeamSite Workflow Builder . enables the creation of visual process flow
Workflow design software for web content management
. supports predefined tasks which can be
linked through transition objects
. enables more control of complex web
management and development
TeamSite B2B Edition 4.5.1 . provides all functions of standard TeamSite
Content management software for 4.5 edition
trading exchanges . adds functionality specific to the
interchange and publication of commerce-
related trading exchanges
OpenDeploy 4.5 . simultaneously transfers content among
Content replication and multiple web servers
distribution software . enables automated scheduling of web site
updates
. ensures conformity of web site roll-out
. allows secure and transactional content
deployment over the Internet
Metatagger . allows granular aggregation and
Content segmentation and segmentation of data
aggregation software
Metafinder . enables more precise data searches using
Search algorithm software vocabulary algorithms
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TeamSite--Content Management
Our flagship product, TeamSite, is designed to develop, maintain and extend
large web sites.
Web Content Management. TeamSite is designed to version, manage and control
all web content. It allows large numbers of contributors across an enterprise
to add, in parallel, web content in a carefully-managed process. TeamSite is
compatible with leading web authoring tools and web application servers,
allowing businesses to leverage existing investments in information technology
systems, content and expertise. This enables a faster time-to-web for eBusiness
initiatives. TeamSite captures and stores the history of all modifications to
the web content. These content histories, or versions, are managed and tracked
for individual web files and for whole web sites.
Workflow. TeamSite is designed to allow diverse groups of users, including
non-technical and technical users, to participate in building and contributing
content to web sites. To facilitate the management of these web content
contributors, TeamSite automates workflow processes such as task assignment,
resource scheduling, content routing, content approval and web site release.
Web Application Development. TeamSite provides programmers with a software
development system that accommodates their choice of software development
tools. TeamSite's computer file versioning features allow programmers to track
software code modifications. Using TeamSite, programmers can reduce the time
required to build, install and test the developed software code by working in a
copy of the running web site.
The architecture of TeamSite enables businesses to implement it without
making significant changes to their existing web content or systems
architecture, resulting in rapid implementation. Additionally, TeamSite's open
architecture allows customers to use their preferred web content authoring
software, web application servers and other web-based technologies. TeamSite
currently operates on Sun Solaris, Microsoft Windows NT and Microsoft Windows
2000 operating systems. TeamSite was first shipped in May 1997. We first
shipped the current version of TeamSite, TeamSite 4.5, in September 2000.
We also license optional software modules and editions with TeamSite that
extend its functionality. Our optional software modules and editions, include
TeamSite Templating, TeamSite Global Report Center, TeamSite Turbo, TeamSite
Front-Office 4.5, TeamSite Workflow Builder and TeamSite B2B Edition 4.5.
TeamSite Templating allows web content to be contributed using customer-defined
templates, thereby eliminating the need for contributors to be familiar with
HTML or client-side applications. TeamSite Global Report Center enables
TeamSite administrators to generate reports on web operations activity.
TeamSite Turbo enables customers to manage dynamic web content such as
applications, personalization rules and targeting rules, thereby enhancing an
enterprise's ability to share content across its business and leverage web
content from one initiative to many others. TeamSite Front Office 4.5 provides
users with an interface for creating and publishing content directly to
TeamSite from their familiar desktop applications, without any additional
training. TeamSite Workflow Builder enables the creation of a visual process
flow for web content management. TeamSite B2B Edition 4.5.1 provides the
standard features of TeamSite 4.5, with added functionality that accelerates
and controls the interchange and syndication of commercial content.
OpenDeploy--Content Replication and Syndication
Our OpenDeploy product transfers web content from development servers to
production web servers. OpenDeploy allows users to automatically and precisely
distribute the same web content to numerous servers that can be located in one
or multiple sites. This "synchronizes" web content so that users can view the
same content, regardless of which server processes the request. By automating
this process, businesses can maximize the availability of their web sites and
minimize the time required for users to access content offered by those sites.
Customers using OpenDeploy can also automate the scheduled deployment of
content. We believe that OpenDeploy provides an effective method for
distribution and integration of dynamic content across web sites.
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OpenDeploy is typically licensed with TeamSite by our customers, but it may
be used on a stand-alone basis. OpenDeploy encrypts content for secure transfer
over TCP/IP. The version of OpenDeploy shipped within the United States uses
128-bit SSL encryption. Due to U.S. export regulations, the international
version does not utilize encryption. OpenDeploy operates on Sun Solaris,
Microsoft Windows NT, Microsoft Windows 2000, IBM AIX, Hewlett Packard UX and
Linux operating systems. We first shipped OpenDeploy in January 1998. The
current version, OpenDeploy 4.5, was shipped in October 2000.
Metafinder
Metafinder uses our proprietary technology to search web site content, using
mathematical formulas that filter and adjust themselves to yield relevant
search results to user queries. By using Metafinder, our customers can improve
the productivity of their personnel and the efficiency of their web site by
facilitating the identification of important data. We acquired the Metafinder
product line in our November 2000 acquisition of Metacode Technologies, Inc.,
and shipped our first version of it in 2001. Metafinder operates on Sun
Solaris, Microsoft Windows NT and Microsoft Windows 2000 operating systems.
Metatagger
Metatagger enhances a publisher's or a content creator's ability to
manipulate web content, allowing a publisher or creator to segment web content
with a fine degree of granularity, automatically aggregate web content such as
articles and stories into relevant packages, and link from text to advertising
information or supporting information such as a footnote. By using Metatagger,
our customers can enhance efficiency, fine-tune web content distribution and
reduce delivery costs. We acquired the Metatagger product line in our November
2000 acquisition of Metacode Technologies, Inc., and shipped our first version
of it in 2001. Metatagger operates on Sun Solaris, Microsoft Windows NT and
Microsoft Windows 2000 operating systems.
Interwoven Services
Our worldwide professional services organization provides implementation
consulting and other technical services to our license customers. We provide
our customers with services necessary to install, integrate, customize and
deploy our solutions. As of December 31, 2000, our services organization
consisted of 241 professional employees. These services professionals utilize a
comprehensive methodology to deliver our web content management products to our
customers and configure our products to meet the specific needs of the
customer. We sell our services in conjunction with licenses of our software
products. These services include:
. needs analysis and web operations strategy;
. software installation and configuration support;
. project management;
. workflow mapping;
. content and web site release management; and
. education and training.
Customer Support and Training
We offer a comprehensive array of customer support programs that are
designed to ensure successful implementation and customer satisfaction. These
programs include maintenance, technical support and professional services, as
well as educational offerings. Our educational offerings include technical
training and end user training. In addition, we offer various levels of product
maintenance to our customers. Maintenance
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services are typically subject to an annual, renewable contract and are
typically priced as a percentage of product license fees.
Technology
We believe that our technology offers our customers and partners a highly-
scalable web content management solution that is implemented through an open
architecture that incorporates widely accepted Internet industry standards and
supports a wide variety of web-based software applications. Our products are
specifically designed for the web. Our customers typically use our technology
as the platform to manage their enterprise-wide web content operations.
Collaboration Through Work Areas, Staging Areas and Editions. TeamSite
provides a virtual work area for each contributor. A virtual work area is a
local, desktop web site representation that appears to a contributor as a
complete, fully-functioning web site. This provides web developers and
contributors the ability to see changes instantaneously in the development
environment as they would appear in the actual production site. This approach
improves quality by promoting individual accountability, allowing web
developers to discover costly bugs and helping web contributors prevent
deployment of inaccurate content to the production site. Users submit revised
content from work areas to a common staging area, a pre-production version of
the web site which consolidates web site changes. After the consolidated
changes in the staging area are approved, the next edition of the production
site can be authorized and deployed. This content management process makes
site-level rollbacks, site recovery and site audits possible.
Content Versioning. TeamSite captures the history of modifications to web
content within each contributors' work area as well as the content within the
common staging area. Our comprehensive content versioning technology allows
customers to record and manage all web content modifications and capture
complete histories of all web files. Our TeamSite Global Report optional
software module can then be used to audit and report on historical changes made
to a web site's files and supporting data files.
Whole-Site Versioning. An extension of our techniques for content versioning
allows TeamSite to capture editions of the entire web site. As the content for
an edition of an entire web site is approved, a full version of this site can
be captured and recorded providing a history of complete site editions. This
provides customers with an effective way to review and roll back to previous
editions of their web sites as necessary for audit, disaster recovery and
compliance requirements.
Concurrent Development. TeamSite supports multiple contributors working on
a single project, and multiple teams working on many projects simultaneously,
by utilizing a technique we refer to as branching. A development branch
typically consists of many work areas connected to one staging area. Branches,
for example, might represent a company's intranet and extranet sites. When
required, the content within these independent branches can be synchronized.
Templating
Our TeamSite Templating optional software module enables non-technical
content contributors to add content through customer-specific style templates,
allowing a preferred look and feel to be leveraged where desired.
Product Features
Open Architecture. Our architecture incorporates widely accepted Internet
industry standards and supports a wide variety of web-based software
applications to integrate into our customers' heterogeneous environments. As a
result, TeamSite also integrates with commercially available web authoring
tools and web application servers that adhere to industry standards. This
allows our customers' content contributors to use their favorite web authoring
software. For example, to add content to a site, a graphics designer may use
Adobe
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Photoshop, a layout expert may use Macromedia Dreamweaver, and a non-technical
contributor may use Microsoft Office 2000. In addition, TeamSite's browser
interface has been developed primarily in Java and JavaScript, two highly
compatible programming languages.
Project Management and Workflow. TeamSite allows customers to manage web
development tasks through automated workflow processes, such as task
assignment, resource scheduling, routing and approval. This enables TeamSite
users to build, enforce and automate the business processes necessary to
maintain high-quality web sites.
Ease of Use. Our SmartContext Editing feature provides non-technical users
with a simple and efficient interface for contributing content as they browse
through the web site. With SmartContext Editing, non-technical contributors are
only required to be familiar with a web browser. For web sites with many
content contributors, TeamSite offers an easy to use, sophisticated technique
for tracking multiple content changes and merging them to a single file.
Deployment and Content Syndication. OpenDeploy allows customers to deploy
content to numerous web sites through a single transaction to ensure consistent
site roll-outs. In addition, it can be used to deploy and run application
programs automatically as well as to replicate content from relational
databases. OpenDeploy can also be used in an encrypted mode for the secure
deployment of content over the Internet.
Scalability, Performance and Availability
Scalability and Performance. TeamSite uses a multi-threaded approach to
promote faster server performance through parallel software code execution. It
also uses C++ and object-oriented programming to promote scalability and
performance. In addition, OpenDeploy can distribute content to a single or to
multiple production web servers simultaneously. This content replication
functionality meets the requirements for the most demanding web sites that are
often located on geographically dispersed servers.
Availability. Our design promotes reliability and availability by allowing
customers to employ their normal data backup and recovery tools. In addition,
critical data is duplicated, providing the necessary redundancy for data
recovery to minimize the potential for data loss.
Industry Standards
Open to All Files, Tools and Applications. Unlike proprietary, closed
implementations, our products have been developed to accommodate industry
leading Internet technologies, such as XML and Java, and other evolving
industry standards. The TeamSite server presents its content through popular
file management systems such as Unix Network File System and Microsoft Windows
Network File System.
eXtensible Markup Language. XML provides customers the ability to integrate
new applications and data with other XML-compliant technologies and legacy
applications. Together with companies such as Microsoft and IBM, we are a
sponsoring member of OASIS, an industry association promoting XML standards.
Our products use and support XML, and they promote XML for data and content
exchange.
Customers
Our products and services are marketed and sold to a diverse group of
customers operating in a broad range of industries. Our customers include both
established companies migrating their operations online and new companies
formed specifically to deliver products and services over the Internet. These
customers typically consider the web and their web operations to be critical to
their future success. As of December 31, 2000, over 650 companies had licensed
our products. In 2000, no customer accounted for ten percent or more of our
total revenues. Our sales of products and services in the United States
accounted for 100%, 100% and 81% of our total revenues in 1998, 1999 and 2000,
respectively.
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Technology Vendors and Service Providers
Technology Vendors
To ensure that our products are well integrated with related web
technologies, we work with vendors of web authoring tools and web application
servers. Web authoring tools, such as Macromedia's Dreamweaver, Microsoft's
Office 2000 and Adobe's Photoshop, provide the content that we manage. Web
application servers, such as Akamai's FreeFlow, Art Technology Group's Dynamo,
BEA System's Weblogic, Hewlett Packard's Sapphire/Web, BroadVision's One-to-One
Commerce, IBM's Net.Commerce and Websphere, Interworld's Commerce Exchange,
Intershop's efinity, iPlanet Application Server, Microsoft's SiteServer and
net.Genesis' net.Analysis, distribute the content managed by our software over
the Internet. We have developed specific product interfaces for some of these
companies, such as software and service modules for Art Technology Group, BEA
Systems, BroadVision, iPlanet, IBM and Microsoft, and some companies refer
customers to us or resell our products. Our products are resold by Accenture
(formerly known as Andersen Consulting), Blue Martini, BroadVision and IBM
Global Services, among others.
Service Providers
We work with leading systems integrators, such as Accenture (formerly known
as Andersen Consulting), Cambridge Technology Partners, Cap Gemini Ernst &
Young, Computer Sciences Corporation, Deloitte & Touche, EDS and KPMG
Consulting and with Internet professional services firms, such as Agency.com,
AnswerThink, Centrifusion, Context, Emerald Solutions, epresense, IBM Global
Services, Intraware, iXL, marchFirst, Modem Media, Luminant, Origin, Primeon,
Rare Medium and Sapient. Our prospective customers frequently retain the
services of these firms for the delivery and implementation of eBusiness
applications, and these firms may recommend a content management solution as
part of the eBusiness application they deliver. We intend to devote significant
resources to develop these relationships.
We believe that these relationships with these entities are essential as we
continue to seek to integrate our products with current and future web
technologies and deploy and implement our solution at customer sites. Our
relationships with technology providers and service providers are not binding,
however, and can be terminated by these providers at any time.
Sales and Marketing
To date, we have sold our products and services primarily through our direct
sales force in North America and Europe. As of December 31, 2000, we had 295
professionals in our direct sales force, of which 198 were located in the
United States, 27 located in Asia Pacific, 66 were located in Europe, and four
were located in Latin America. We intend to increase the size of our direct
sales force and establish additional sales offices in the United States and
abroad. In May 1999, we opened our first international sales office in the
United Kingdom to support the management of direct and indirect sales channels
in Europe. During 2000, we opened 10 offices in the United States and 10
offices abroad.
We currently have operations in Australia, Brazil, Canada, France, Germany,
Hong Kong, Japan, Mexico, Netherlands, the United Kingdom, Singapore, Sweden
and the United States, and we tend to introduce localized versions of
Interwoven applications for the major European and Asian markets. We intend to
further expand our global sales and marketing capabilities by increasing the
size of our direct sales and marketing organizations in major markets, and by
continuing to develop our channel partner relationships. As market conditions
warrant, we intend to increase our direct sales and marketing activities
worldwide.
We are developing our indirect sales channel by expanding our relationships
with leading Internet technology vendors, Internet professional services firms
and systems integrators that recommend and, when appropriate, resell our
products.
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Our ability to achieve significant revenue growth in the future will depend
in large part on how successfully we recruit, train and retain sufficient
direct sales, technical and customer support personnel, and how well we
continue to establish and maintain relationships with our strategic partners.
We believe that the complexity of our products and the large scale deployments
anticipated by our customers will require a number of highly trained customer
support personnel.
We believe that demand is increasing for content management solutions such
as those we sell. We may not be able to expand our sales and marketing staff,
either domestically or internationally, to take advantage of any increase in
demand for those solutions. Our failure to expand our sales and marketing
organization or other distribution channels could have a materially adverse
affect on our business. See "Factors Affecting Future Results--We must attract
and retain qualified personnel, which is particularly difficult for us because
we compete with other Internet-related software companies and are located in
the San Francisco Bay area, where competition for personnel is extremely
intense."
Research and Development
We invest significantly in research and development to enhance our current
products, and develop new products. Our research and development expenses were
$1.8 million in 1998, $4.2 million in 1999 and $17.7 million in 2000. We expect
that we will increase our product development expenditures in the future. As of
December 31, 2000, 149 employees were engaged in research and development
activities and we plan to continue to hire additional engineers to further our
research and development activities. Our business could be harmed if we were
not able to hire and retain the required number of engineers. See "Factors
Affecting Future Results--We must attract and retain qualified personnel, which
is particularly difficult for us because we compete with other Internet-related
software companies and are located in the San Francisco Bay area, where
competition for personnel is extremely intense."
We may fail to complete our product development efforts within our
anticipated schedules, and even if completed, the products developed may not
have the features necessary to make them successful in the marketplace. Future
delays or problems in the development or marketing of product enhancements or
new products could harm our business. See "Factors Affecting Future Results--
Difficulties in introducing new products and upgrades in a timely manner will
make market acceptance of our products less likely."
Acquisitions
In July 1999, we acquired Lexington Software Associates, a software
consulting company, to help support our existing customer base and to help
attract and retain new customers. In July 2000, we acquired Neonyoyo, a
developer of wireless technology that delivers targeted XML content rendered
appropriately, regardless of device type, to support content management
initiatives, including wireless initiatives, for our customer base. In October
2000, we acquired Ajuba Solutions, a software development company with
expertise in XML, Java and eBusiness integration, to expand our research and
development staff to handle our XML-based initiatives, especially our wireless
and B2B initiatives. Additionally, in November 2000 we acquired Metacode
Technologies, a content tagging and taxonomy software developer, to enhance
TeamSite's functionality by enabling the use of metadata, or data about data.
Competition
The market for content management solutions is rapidly emerging and is
characterized by intense competition. We expect existing competition and
competition from new market entrants to increase dramatically. A growing number
of companies are vying to provide web content management solutions. In
addition, existing or potential customers may develop or may have developed in-
house solutions, which might make it more difficult for us to sell products to
them. In this market for content management solutions, new products are
frequently introduced and existing products are often enhanced. Also, new
companies, or alliances among existing companies, may be formed that may
rapidly achieve a significant market position.
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We compete with third-party content management solution providers, primarily
Documentum, Eprise, Filenet, Intranet Solutions, Rational Software and
Vignette. We also compete with providers of workgroup solutions, content
publishing application providers and current or potential customers who may
develop in-house solutions. We may face increased competition from these
providers in the future. Other potential competitors include client/server
software vendors which are developing or extending existing products which
address our market. In addition, although we currently partner with a number of
companies that provide complementary products such as web tools, enterprise
document repositories and web servers, these partners may introduce competitive
products in the future. Other large software companies, such as Microsoft,
Oracle and IBM, may also introduce competitive products. Many of our existing
and potential competitors have greater technical, marketing and financial
resources than we do.
We believe that competitive factors in the web content management industry
include:
. the quality, scalability and reliability of software;
. functionality that enables a broad base of contributors to add and modify
web content;
. interoperability with all leading web authoring tools and web application
servers based on industry standards;
. functionality that enables advanced workflow;
. the ability to leverage existing information technology infrastructure;
. adherence to emerging industry standards, including XML; and
. expandability and scalability of web content repository.
We believe our products compete favorably on each of these factors.
Successful Customer Implementations
Our success depends on our customers' successful implementations of our
applications. We actively support customer deployment efforts by providing
Internet and telephone technical support, providing comprehensive instructor-
led training, and by assigning to each customer an account management team that
includes a sales representative, a technical account manager and an executive
sponsor.
Proprietary Rights and Licensing
Our success depends upon our ability to maintain the proprietary aspects of
our technology and operate without infringing the proprietary rights of others.
We rely on a combination of patent, trademark, trade secret and copyright law,
and contractual restrictions, to protect the proprietary aspects of our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. These legal
protections afford only limited protection for our technology. We currently do
not have any issued United States or foreign patents, but we have applied for
several U.S. patents. It is possible that patents will not be issued from our
currently pending patent applications. Our license agreements impose
restrictions on our customers' ability to utilize our software. We also seek to
protect our intellectual property by requiring employees and consultants with
access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code. There can be no assurance
that all employees or consultants have signed or could sign these agreements.
Due to the rapid pace of technological change, we believe that to establish and
maintain a technology leadership position, developing the technological and
creative skills of our personnel, and enhancing new product developments are as
important to our business as the various legal protections of our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of
our software exists,
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software piracy can be expected to be a persistent problem. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity.
However, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States.
Any litigation could result in substantial costs and diversion of resources
and could harm our business, operating results and financial condition. There
can be no assurance that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop similar
technology. Any failure by us to meaningfully protect our property could
seriously harm our business, operating results and financial condition.
To date, we have not been notified that our products directly infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by us with respect to our current or future
products. We expect that developers of web-based commerce software products
will increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and as the functionality of
products in different segments of the software industry increasingly overlaps.
Any claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all. A successful infringement claim against us
and our inability to license the infringed technology or develop or license
technology with comparable functionality could seriously harm our business,
financial condition and operating results. See "Factors Affecting Future
Results--We might not be able to protect and enforce our intellectual property
rights, a loss of which could harm our business."
Seasonality
Our business has experienced seasonality, in part due to customer buying
patterns. In recent years, we have generally had weaker demand in the quarter
ending in March when compared to the quarters ending in June, September and
December. We expect this pattern to continue.
Employees
As of December 31, 2000, we employed 888 persons, including 374 in sales and
marketing, 241 in professional services, 149 in research and development and
124 in general and administrative. Of our employees, 48 were located in Asia
Pacific, 115 were located in Europe, four were located in Latin America and the
remainder were located in North America. Our future success will depend in part
on our continued ability to attract, hire and retain qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
we will be able to identify, attract and retain such personnel in the future.
None of our employees is represented by a labor union (other than statutory
unions required by law in certain European countries). We have not experienced
any work stoppages and consider our relations with our employees to be good.
See "Factors Affecting Future Results--We depend on our direct sales force to
sell our products, so future growth will be constrained by our ability to hire,
train and retain sales personnel" and "Factors Affecting Future Results--We
must attract and retain qualified personnel, which is particularly difficult
for us because we compete with other Internet-related software companies and
are located in the San Francisco Bay area, where competition for personnel is
extremely intense."
ITEM 2. PROPERTIES.
Our headquarters occupies approximately 52,000 square feet in Sunnyvale,
California under leases that expire in 2003. We also lease sales and service
offices in the metropolitan areas of Atlanta, Baltimore, Boston, Chicago,
Dallas, Los Angeles, New York City, San Francisco, Seattle and Washington, D.C.
Outside the United States, we have sales and service offices in Australia,
Brazil, Canada, France, Germany, Hong Kong, Japan, Mexico, Netherlands,
Singapore, Sweden and the United Kingdom.
12
We believe that our existing facilities are adequate for our current needs.
We are in the process of locating additional office space for what we expect
our needs will be in the future.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 12, 2000 we held a Special Meeting of Stockholders.
Descriptions of the matters voted upon and the results of such meeting are
set forth below:
Votes Votes Votes Votes Broker
For Against Withheld Abstained Non-votes
---------- ---------- -------- --------- ---------
1. Amendment of the
Company's Third Amended
and Restated
Certificate of
Incorporation to
increase the authorized
number of shares of
Common Stock issuable
by the Company from
100,000,000 to
500,000,000............ 57,400,570 24,840,130 -- 20,578 --
2. Amendment of the
Company's 1999 Equity
Incentive Plan to
increase the number of
shares of Common Stock
reserved for issuance
thereunder by
8,000,000.............. 37,943,344 36,481,518 -- 39,376 7,797,040
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Price Range of Common Stock
Our common stock has been quoted on the Nasdaq National Market under the
symbol "IWOV" since our initial public offering on October 8, 1999. Before
then, there was no public market for our common stock. The following table
shows, for the periods indicated, the high and low sales prices per share of
our common stock. The prices indicated below have been adjusted to give
retroactive effect to stock splits through March 31, 2001.
Year Ended
--------------------------
December 31, December 31,
1999 2000
------------ -------------
Quarter High Low High Low
------- ------ ----- ------ ------
First............................................. $ n/a $ n/a $50.00 $27.13
Second............................................ $ n/a $ n/a $31.16 $10.41
Third............................................. $ n/a $ n/a $68.47 $27.44
Fourth............................................ $44.47 $9.19 $67.69 $20.72
On March 21, 2001 the closing sale price of the Common Stock was $11.50 per
share. On that date, there were 758 holders of record. This does not include
the number of persons whose stock is in nominee or "street name" accounts
through brokers.
Dividends
We have never declared or paid cash dividends on our common stock or other
securities, and we do not anticipate paying a cash dividend in the foreseeable
future. Our line of credit currently prohibits the payment of dividends.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2000, we issued an aggregate of
approximately 2.3 million shares of common stock in connection with our
acquisitions of Ajuba Solutions, Inc. in October 2000, and Metacode
Technologies, Inc. in November 2000. The shares of our common stock were issued
in private transactions that were exempt from registration under the Securities
Act of 1933 pursuant to Section 4(2) or Regulation D thereunder. The shares of
our common stock were issued in private transactions that were exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) or
Regulation D thereunder.
During the quarter ended December 31, 2000 we issued to certain former
stockholders of Lexington Software Associates, Inc. ("LSA") 4,560 shares of
common stock upon net exercise of warrants to purchase Series E Preferred Stock
issued in connection with our acquisition of LSA in July 1999. These warrants
became exercisable for common stock upon the closing of our initial public
offering on October 14, 1999, when all of our preferred stock converted into
common stock. These securities were not registered under the Securities Act of
1933 in reliance upon the exception provided by Section 4(2) or Regulation D
promulgated thereunder. The shares of our common stock were issued in private
transactions that were exempt from registration under the Securities Act of
1933 pursuant to Section 4(2) or Regulation D thereunder.
Use of Proceeds
Our first registration statement, filed on Form S-1 (Registration No. 333-
83779) was declared effective by the Commission on October 7, 1999. There has
been no change to the disclosure contained in our report on Form 10-Q for the
quarter ended March 31, 2000 with respect to the use of proceeds generated by
our initial public offering.
14
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is qualified in its
entirety by, and should be read in conjunction with, our consolidated financial
statements and the notes thereto, and Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations. The selected
consolidated statements of operations and balance sheet data as of and for each
of the five years in the period ended, and as of December 31, 2000 have been
derived from our audited consolidated financial statements. The supplemental
consolidated financial data for each of the five years in the period ended
December 31, 2000 have been derived from our unaudited results of operations,
excluding stock based compensation and acquisition charges. All share and per
share amounts have been adjusted to give retroactive effect to stock splits
through March 31, 2001.
Years Ended December 31,
--------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- -------- --------
(in thousands, except per share amounts)
Consolidated Statement of
Operations Data:
Revenues......................... $ -- $ 168 $ 4,003 $ 16,806 $132,129
Gross profit..................... -- 73 2,670 10,049 92,488
Total operating expenses......... 520 2,933 9,165 27,065 135,988
Loss from operations............. (520) (2,860) (6,495) (17,016) (43,500)
Net loss......................... (510) (2,948) (6,344) (15,655) (32,055)
Net loss per share
Basic and diluted.............. $(0.06) $ (0.34) $ (0.71) $ (0.95) $ (0.35)
Weighted average shares--basic
and diluted................... 9,128 9,424 10,532 30,472 91,979
Supplemental Consolidated
Financial Data (unaudited):
Net loss before Stock based
compensation, goodwill,
intangible amortization and non-
recurring charges............... $ (510) $(2,948) $(6,344) $(11,591) $ (391)
Diluted net loss per share before
stock based compensation,
goodwill, intangible
amortization and non-recurring
charges......................... $(6.06) $ (0.34) $ (0.71) $ (0.38) $ (0.00)
December 31,
---------------------------------------
1996 1997 1998 1999 2000
---- ------ ------- ------- --------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.......................... $ 17 $1,019 $ 9,022 $55,648 $222,284
Working capital....................... (208) 792 8,844 54,413 199,484
Total assets.......................... 92 1,384 13,908 83,079 524,209
Long-term debt and capital lease
obligations, less current portion.... -- 87 1,257 -- --
Manditorily redeemable convertible
preferred stock...................... 385 4,627 20,464 -- --
Total shareholders' equity (deficit).. (525) (3,734) (10,752) 75,340 454,351
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with Item 6, Selected Financial Data,
as well as the quarterly financial data, and our consolidated financial
statements and notes appearing elsewhere in this Form 10-K.
Overview
Interwoven was incorporated in March 1995 to provide software products and
services for web content management. Our products allow large teams of people
across an enterprise to contribute and edit web content on a collaborative
basis, reducing the time-to-web for critical eBusiness initiatives. From March
1995 through March 1997, we were a development stage company conducting
research and development for our initial products. In May 1997, we shipped the
first version of our principal product, TeamSite. We have subsequently
developed and released enhanced versions of TeamSite and have introduced
related products. As of December 31, 2000, we had sold our products and
services to over 650 customers. We market and sell our products primarily
through a direct sales force and augment our sales efforts through
relationships with systems integrators and other strategic partners. We are
headquartered in Sunnyvale, California and maintain additional offices in the
metropolitan areas of Atlanta, Boston, Chicago, Dallas, Los Angeles, New York
City, San Francisco, Seattle and Washington, D.C. Our revenues to date have
been derived primarily from accounts in North America. In addition, we have
offices in Australia, Brazil, Canada, France, Hong Kong, Japan, Mexico,
Netherlands, United Kingdom, Singapore and Sweden. We had 888 employees as of
December 31, 2000.
We derive revenues from the license of our software products and from
services we provide to our customers. To date, we have derived the majority of
our license revenues from licenses of TeamSite. License revenues are recognized
when persuasive evidence of an agreement exists, the product has been
delivered, no significant post-delivery obligations remain, the license fee is
fixed or determinable and collection of the fee is probable. Services revenues
consist of professional services and maintenance fees. Professional services
primarily consist of software installation and integration, business process
consulting and training. We generally bill our professional services customers
on a time and materials basis and recognize revenues as the services are
performed. Maintenance agreements are typically priced based on a percentage of
the product license fee, and typically have a one-year term that is renewable
annually. Services provided to customers under maintenance agreements include
technical product support and an unspecified number of product upgrades as
released by us during the term of a maintenance agreement. Revenues from
maintenance support agreements are recognized ratably over the term of the
agreement.
Consistent with authoritative guidance on revenue recognition, we assess the
probability of collection on all software license agreements and defer revenue
when collection is not probable. From inception through the fourth quarter of
2000, the limited collection history and infancy of our international sales
infrastructure lead to us to defer revenue until cash collection for sales
occurring outside the United States. We now believe that a more mature sales
infrastructure coupled with a history of collections in several geographic
regions allows us to ascertain that collections are probable in Northern
Europe. Therefore, beginning on January 1, 2001, we will recognize revenue upon
the signing of the contract and shipment of the product in Northern Europe. We
will continue to assess probability of collections on an individual agreement-
by-agreement basis. Further, we will continually assess the appropriateness of
revenue recognition on sales agreements in other geographic locations once we
have developed an adequate infrastructure and collection history in those
regions. As of December 31, 2000, $34.5 million in deferred revenue consisted
of $17.8 million related to maintenance and $16.7 million related to services
or licenses that had no ongoing obligation, of which $4.5 million was
international. At December 31, 2000, the amount deferred until cash collection
that related to Northern Europe was approximately $2.3 million.
We have incurred substantial costs to develop our technology and products,
to recruit and train personnel for our engineering, sales and marketing and
services organizations, and to establish our administrative
16
organization. As a result, we have incurred net losses through the quarter
ending December 31, 2000 and had an accumulated deficit of $58.0 million as of
December 31, 2000. We anticipate that our cost of services revenues and
operating expenses in absolute dollars will increase substantially in the
future as we grow our services organization to support an increased level and
expanded number of services offered, increase our sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, and improve our operational and financial systems.
Accordingly, we expect to incur additional losses for the foreseeable future as
we continue to expand our operations. In addition, our limited operating
history and the weakness of the current economic environment generally makes
the prediction of future results of operations difficult and, accordingly,
there can be no assurance that we will achieve or sustain profitability.
We have generally made business decisions with reference to net profit
metrics excluding non-cash charges, for example, acquisition and stock based
compensation charges. We expect to continue to make acquisitions, incur stock
based compensation and intangible amortization charges, which will increase our
losses inclusive of these non-cash expenses.
We acquired a total of four corporations in 1999 and 2000: Lexington
Software Associates, Inc.; Neonyoyo Inc.; Ajuba Solutions Inc.; and Metacode
Technologies, Inc. Under U.S. generally accepted accounting principles, we have
accounted for the four business combinations using the purchase method of
accounting and recorded the market value of our common stock and options issued
in connection with them and the amount of direct transaction costs as the cost
of acquiring these entities. That cost is allocated among the individual assets
acquired and liabilities assumed, including various identifiable intangible
assets such as goodwill, in-process research and development, acquired
technology, acquired workforce and convenants not to compete, based on their
respective fair values.
We allocated the excess of the purchase cost over the fair value of the net
assets to goodwill. The impact of purchase accounting on our operating results
is significant. The impact of these mergers and acquisitions resulted in
acquisition-related expenses of $24.1 million for 2000. We have also recorded
deferred compensation liabilities related to options assumed and shares issued
to effect business combinations and options granted below fair market value
associated with our initial public offering in October 1999, in the amount of
$7.5 million in 2000.
The following table reflects the prospective impact of deferred compensation
costs and the annual amortization of purchased intangibles attributable to our
mergers and acquisitions that have closed in the past two years (in thousands):
2001 2002 2003 2004
-------- ------- ------- ------
Intangible Assets......................... $ 88,244 $86,444 $63,272 $ 542
Stock Based Compensation.................. 15,308 7,645 3,464 1,209
-------- ------- ------- ------
$103,552 $94,089 $66,736 $1,751
======== ======= ======= ======
The future amortization expense related to the acquisitions and deferred
stock based compensation may be accelerated as we assesses the value and useful
life of the intangible assets from time to time.
Results of Operations
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. For example, we make statements of our expectations
about future financial performance, the growth of our business and trends in
our business. These forward-looking statements involve a number of risks and
uncertainties, including those identified in the section of this report
entitled "Factors Affecting Future Results," which could cause actual results
to differ from those discussed in the forward-looking statements. Forward-
looking statements in this report are identified by words
17
such as "believes", "anticipates", "expects", "intends", "may", "will", and
similar expressions. In addition, any statements which refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. We undertake no obligation to release publicly the
results of any revisions to these forward-looking statements that could occur
after the filing of this report. You are urged to review carefully our various
disclosures, in this report and our other reports filed with the SEC, that
attempt to advise you of the risks and factors that may affect our business.
The following table sets forth, as a percentage of total revenue,
consolidated statement of operations data for the periods indicated:
Year Ended
December 31,
------------------
1998 1999 2000
---- ---- ----
Revenues:
License.................................................. 79 % 64 % 66 %
Services................................................. 21 36 34
---- ---- ---
Total revenues......................................... 100 100 100
Cost of revenues:
License.................................................. 1 1 1
Services................................................. 32 39 29
---- ---- ---
Total cost of revenues................................. 33 40 30
Gross profit............................................... 67 60 70
Operating expenses:
Research and development................................. 45 25 13
Sales and marketing...................................... 120 93 55
General and administrative............................... 43 19 11
Amortization of deferred stock-based compensation........ 20 22 6
Amortization of acquired intangible assets............... -- 2 17
Writeoff of in-process research & development............ -- -- 1
---- ---- ---
Total operating expenses............................... 228 161 103
---- ---- ---
Loss from operations....................................... (161) (101) (33)
Interest and other income (expense), net................... 4 8 9
Provision for income taxes............................... -- -- --
---- ---- ---
Net loss................................................... (157)% (93)% (24)%
==== ==== ===
Comparison of 1999 and 2000
Revenues
Total revenues increased 686% from $16.8 million in 1999 to $132.1 million
in 2000. This increase reflects sales to a larger number of new customers and
higher average sales price per customer. The number of new customers increased
from 175 as of December 31, 1999 to over 650 as of December 31, 2000. The
average sales price per customer increased from approximately $217,000 to
approximately $300,000. Our ability to attract new customers was a result of
our developing a larger and more experienced sales and marketing staff, which
numbered 81 persons as of December 31, 1999 and 346 persons as of December 31,
2000. The increase in average sales price per customer was primarily a result
of selling more user licenses in the average new order, and to a lesser extent,
increased sales of optional software modules and price increases.
License. License revenues increased 713% from $10.7 million in 1999 to $87.0
million in 2000. License revenues represented 64% and 66% of total revenues in
those periods. This increase in license revenues reflects the same factors that
caused total revenues to increase from period to period.
18
Services. Services revenues increased 640% from $6.1 million in 1999 to
$45.1 million in 2000. Services revenues represented 36% and 34% of total
revenues in those periods. The increase in services revenues reflects a $22.2
million increase in professional services fees, a $11.6 million increase in
maintenance fees and a $5.2 million increase in training fees. The increased
professional services and maintenance fees were generated by an expanded number
of customers who licensed our products.
Cost of Revenues
License. Cost of license revenues includes expenses incurred to manufacture,
package and distribute our software products and related documentation, and
costs of licensing third-party software sold in conjunction with our software
products. Cost of license revenues increased 508% from $181,000 for 1999 to
$1.1 million for 2000. Cost of license revenues represented 2% and 1% of
license revenues in 1999 and 2000, respectively. The increase in cost of
license revenues was primarily attributable to an increase in royalties paid to
third party software vendors, and, to a lesser extent, to an increase in the
volume of products shipped.
We expect cost of license revenues to increase in the future. We expect cost
of license revenues as a percentage of license revenue to vary from period to
period, depending upon the timing of payments to third party software vendors
and amounts of license revenue recognized in each period.
Services. Cost of services revenues consists primarily of salary and related
costs of our professional services, training, maintenance and support
personnel, as well as subcontractor expenses. Cost of services revenues
increased 486% from $6.6 million for 1999 to $38.5 million for 2000. Cost of
services revenues represented 108% and 85% of services revenues, respectively,
in those periods. This increase in cost of services revenues was attributable
to an increase in the number of service employees from 60 to 241, and to a
$11.6 million increase in subcontractor expenses.
We expect our cost of services revenues to increase for the foreseeable
future as we expand our services staff and consulting organizations. Since
services revenues have lower gross margins than license revenues, we expect
this expansion to reduce our gross margins, unless our license revenues
increase significantly. We expect cost of services revenues as a percentage of
services revenues to vary from period to period, depending on whether the
services are performed by our employees or by subcontractors and on the overall
use of our professional services staff. Furthermore, the blend of employees and
sub-contractors we use is affected by the mix of services we provide.
Gross Profit
Gross profit increased 820% from $10.0 million for 1999 to $92.5 million for
2000. Gross profit represented 60% and 70% of total revenues, respectively, in
those periods. This increase reflects the more rapid increase of license
revenues compared to services revenues as our customer base has grown. We
expect to increase the capacity of our professional services organization to
meet the demand for services from our customers. We expect gross profit as a
percentage of total revenues to fluctuate from period to period primarily as a
result of changes in the relative proportion of license and services revenues
and to a lesser extent, as a result of changes in the cost of license revenues
and cost of service revenues.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
increased 322% from $4.2 million for 1999 to $17.7 million for 2000,
representing 25% and 13% of total revenues in those periods, respectively. The
increase in research and development expenses was due to an increase in the
number of our product development employees from 36 to 149 persons, to
increased use of subcontractors, and to higher associated wages, salaries and
recruitment costs. The decrease in research and development expenses as a
percentage of total revenues reflects a higher growth rate in total revenues
compared to the growth rate in research and development expenses. We believe
19
that continued investment in research and development is critical to our
strategic objectives, and we expect that the amounts of research and
development expenses will increase in future periods. We expect that the
percentage of total revenues represented by research and development expenses
will fluctuate from period to period, depending primarily on timing of new
hires and, to a lesser extent, on the size and timing of product development
projects. To date, all software development costs have been expensed in the
period incurred, as the costs incurred after technological feasibility have
been insignificant.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related costs for sales and marketing personnel, as well as sales
commissions, travel expenses and marketing programs. Sales and marketing
expenses increased 366% from $15.6 million for 1999 to $72.7 million for 2000,
representing 93% and 55% of total revenues, respectively, in those periods.
This increase in sales and marketing expenses was caused by higher sales
commissions and bonuses of $24.0 million, increases in sales and marketing
personnel costs of $16.1 million, and increased marketing-related costs of $3.2
million. The decrease in sales and marketing expenses as a percentage of total
revenues reflects a higher growth rate in total revenues compared to the growth
rate in sales and marketing expenses. We expect that the dollar amounts of
sales and marketing expenses will increase in future periods as we seek to
expand our customer base and increase brand awareness. We also anticipate that
the percentage of total revenues represented by sales and marketing expenses
will fluctuate from period to period, depending on such factors as the timing
of new hires on new marketing programs and the levels of revenues in each
period.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for accounting, human resources, legal
and other administrative functions, as well as provisions for doubtful
accounts. General and administrative expenses increased 333% from $3.2 million
for 1999 to $13.9 million for 2000, representing 19% and 11% of total revenues,
respectively. The increase in general and administrative expenses was caused by
additional staffing of these functions to support expanded operations during
this same period. The decrease in general and administrative expenses as a
percentage of total revenues reflects a higher growth rate in total revenues,
compared to the growth rate in general and administrative expenses. We expect
general and administrative expenses to increase in 2001 as we add personnel to
support expanding operations and incur other costs related to the growth of our
business. We expect that the percentage of total revenues represented by
general and administrative expenses will fluctuate from period to period,
depending on such factors as the timing of new hires and the size and timing of
expansion projects.
Amortization of Deferred Stock-Based Compensation. We recorded deferred
stock-based compensation of $7.3 million and $30.4 million for stock options
granted in 1999 and stock options granted and assumed in 2000, respectively. In
2000, we recorded deferred stock-based compensation of $28.8 million in
connection with granting of stock options and issuance of shares related to the
acquisitions of Neonyoyo, Metacode Technologies and Ajuba Solutions. These
compensation amounts represent the differences between the exercise prices of
the assumed stock options and the deemed fair value of our common stock at the
time the stock options were assumed by us. Amortization of deferred stock-based
compensation was $3.7 million and $7.5 million for the years ended December 31,
1999 and 2000, respectively. Approximately $1.1 million, $647,000, $1.6 million
and $400,000 of deferred stock based compensation amortization relates to
personnel in services, research and development, sales and marketing and
general and administrative departments, respectively, for 1999. Approximately
$633,000, $3.4 million, $2.5 million and $898,000 of deferred stock based
compensation amortization relates to personnel services in research and
development, sales and marketing and general and administrative departments,
respectively, for 2000.
Amortization of Acquired Intangible Assets. In July 1999, we recorded
intangible assets of approximately $800,000 in connection with the acquisition
of Lexington Software Associates Inc., including goodwill in the amount of
approximately $300,000 and intangible assets related to the workforce of
approximately $500,000. The total purchase price for this acquisition was
approximately $800,000. In July 2000, we recorded intangible assets of
approximately $85.4 million in connection with the acquisition of Neonyoyo
Inc., including goodwill
20
in the amount of approximately $77.9 million and intangible assets related to
workforce and covenants not to compete of Neonyoyo of approximately $7.5
million. The total purchase price for this acquisition was approximately $88.2
million. The purchase price was allocated to the tangible and intangible assets
acquired and liabilities assumed based upon their respective fair values at the
acquisition date. In October 2000, we recorded intangible assets of
approximately $27.2 million in connection with the acquisition of Ajuba
Solutions, Inc. including goodwill in the amount of approximately $25.7 million
and intangible assets related to workforce of approximately $1.5 million of the
purchase price. The total purchase price for this acquisition was approximately
$24.9 million. In November 2000, we recorded intangible assets of approximately
$147.8 million in connection with the acquisition of Metacode Technologies,
Inc. including goodwill of approximately $143.5 million, intangible assets
related to workforce of Metacode approximately $1.7 million and completed
technology of approximately $2.6 million of the purchase price. The total
purchase price for this acquisition was approximately $152.5 million.
Amortization of acquired intangible assets was $377,000 for 1999 and $22.3
million for 2000.
Writeoff of In-Process Research & Development. We recorded purchased in-
process research and development of approximately $1.7 million and
approximately $100,000 related to the acquisitions of Neonyoyo and Metacode,
respectively, were recorded representing the present value of the estimated
after-tax cash flows expected to be generated by the purchased technology,
which had not yet reached technological feasibility at the acquisition date.
Interest and Other Income (Expense), Net
Interest income and other expense, net, increased from $1.4 million for 1999
to $12.1 million for 2000, due to increased interest income earned on proceeds
from our initial public offering in October 1999 and our follow-on public
offering in February 2000.
Provision for Income Taxes
A $610,000 provision was recorded for state and foreign taxes in 2000. As of
December 31, 2000, our federal and California income tax net operating loss
carryforwards were approximately $7.7 million and $1.7 million excluding our
stock compensation deductions, and $31.0 million and $17.5 million, including
stock compensation deductions, respectively. If not used, the federal net
operating loss carryforwards will begin to expire in 2011, and the California
net operating loss carryforwards will begin to expire in 2004. Our federal and
California research tax credit carryforwards for income tax purposes are
approximately $792,000 and $703,000, respectively. If not used, the federal
research tax credit carryforwards will begin to expire in 2011. In the event of
a change in ownership, as defined under federal and California tax laws, the
use of these carryforwards could be limited.
Comparison of 1998 and 1999
Revenues
Total revenues increased 320% from $4.0 in 1998 to $16.8 million in 1999.
This increase was attributable to greater market acceptance of our software
products and an increase in the number of sales and marketing staff, resulting
in an increased number of customers.
License. License revenues increased 237% from $3.2 million in 1998 to $10.7
million in 1999. For 1998 and 1999 license revenues represented 79%, and 64% of
total revenues, respectively. The decline in the percentage of total revenues
represented by license revenues from 1998 to 1999 reflects the more rapid
growth of services revenues due to a growing customer base.
Services. Services revenues increased 638% from $827,000 in 1998 to $6.1
million in 1999. For 1998 and 1999 services revenues represented 21% and 36% of
total revenues, respectively. The increase in services
21
revenues from 1998 to 1999 reflects an increase in both professional services
and maintenance fees generated from an expanded number of customers who
licensed our products.
Cost of Revenues
License. Cost of license revenues increased 207% from $59,000 in 1998 to
$181,000 in 1999 and represented 2% of license revenues in both 1998 and 1999,
respectively. The increase in cost of license revenues reflects increased sales
of third-party products sold in conjunction with our software products. Cost of
license revenues includes expenses incurred to manufacture, package and
distribute software products and related documentation, as well as costs of
licensing third-party software sold in conjunction with our software products.
The increase in cost of license revenues reflects increased sales of our
products.
Services. Cost of services revenues consisted primarily of salary and
related costs of our professional services, training, maintenance and support
staffs, as well as subcontractor expenses. Cost of services revenues increased
416% from $1.3 million in 1998 to $6.6 million in 1999. Cost of services
revenues represented 154%
and 108% of services revenues, respectively, in those periods. This increase
was due to an increase in the number of employees from 11 in 1998 to 60 in
1999, and a $45,000 increase in subcontractor expenses.
Gross Profit
Gross profit increased 276% from $2.7 million in 1998 to $10.0 million in
1999, representing 67% and 60% of total revenues, respectively, in those
periods. This increase reflects increased license and services revenues from a
growing customer base. The decrease in gross profit percentage was a result of
the expansion of our professional services organization.
Operating Expenses
Research and Development. Research and development expenses consisted
primarily of personnel and related costs to support product development.
Research and development expenses increased 134% from $1.8 million in 1998 to
$4.2 million in 1999. Research and development expenses represented 45% and 25%
of total revenues in 1998 and 1999, respectively. The increase was primarily
due to an increase in the number of product development personnel. All software
development costs were expensed in the period incurred.
Sales and Marketing. Sales and marketing expenses consisted primarily of
salaries and related costs for sales and marketing personnel, sales
commissions, travel and marketing programs. Sales and marketing expenses
increased 223% from $4.8 million in 1998 to $15.6 million in 1999. Sales and
marketing expenses represented 120% and 93% of total revenues in 1998 and 1999,
respectively. The increase from 1998 to 1999 reflects increases in sale and
marketing personnel costs of $4.1 million, higher sales commissions and bonuses
of $3.2 million and increased marketing related costs of $652,000.
General and Administrative. General and administrative expenses consisted
primarily of salaries and related costs for accounting, human resources, legal
and other administrative functions, as well as provisions for doubtful
accounts. General and administrative expenses increased 85% from $1.7 million
in 1998 and to $3.2 million in 1999, representing 43% and 20% of total revenues
in 1998 and 1999, respectively. This increase reflects additional staffing of
these functions to support expanded operations during this same period.
Amortization of Deferred Stock-Based Compensation. In 1998 and 1999, we
recorded deferred stock-based compensation of $1.9 million and $7.3 million in
connection with stock options granted during 1998 and 1999, respectively. These
amounts represent the difference between the exercise price of stock options
granted during those periods and the deemed fair value of our common stock at
the time of the grants. Amortization of deferred stock-based compensation was
$812,000 and $3.7 million for 1998 and 1999, respectively. There were no
deferred stock based compensation charges during 1998. Approximately
$1.1 million, $647,000, $1.6 million and $400,000 of deferred stock based
compensation amortization relates to personnel in services,
22
research and development, sales and marketing, and general and administrative
departments, respectively, for the years ended December 31, 1999.
Amortization of Acquired Intangible Assets. In July 1999, we recorded
intangible assets of approximately $800,000 in connection with the acquisition
of Lexington Software Associates, Inc. Goodwill related to this transaction
approximated $300,000 and intangible assets related to the workforce of
Lexington Software Associates approximated $500,000 of the purchase price. The
total purchase price for this acquisition was approximately $800,000. The
purchase price was allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their respective fair values at the acquisition
date. Amortization of acquired intangible assets was $377,000 for 1999.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, increased from $151,000 in 1998 to
$1.4 million in 1999. The increase from 1998 to 1999 was due to increased
interest income earned from cash balances on hand as a result of the sale of
our preferred stock in June 1999 and our initial public offering in October of
1999, partially offset by an increase in interest expense.
Income Taxes
As of December 31, 2000, we had approximately $31.0 million of federal and
$12.0 million of California net operating loss carryforwards available to
reduce future taxable income. If not used, the federal net operating loss
carryforwards will begin to expire in 2011, and the California net operating
loss carryforwards will begin to expire in 2004. Events which cause limitations
in the amount of net operating loss that we may use in any one year include a
cumulative ownership change of more than 50% over a three-year period. Our
federal and California research tax credit carryforwards for income tax
purposes are approximately $792,000 and $703,000, respectively. If not used,
the federal research tax credit carryforwards will begin to expire in 2011. Our
accounting for deferred taxes under Statement of Financial Standards No. 109
involves the evaluation of a number of factors concerning the realizability of
our deferred tax assets, such as our history of operating losses and the nature
of our deferred tax assets. Based on the available objective evidence we
conclude that the net deferred tax assets will not be fully realizable. See
Note 6 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Net cash provided by operating activities was $20.0 million in 2000. Net
cash provided by operating activities reflected decreasing net losses offset in
part by an increase in accounts receivable, accrued liabilities and deferred
revenue.
During 2000, our investing activities included purchases of property and
equipment, principally computer hardware and software. Cash used to purchase
property and equipment was $13.8 million during 2000. We expect that capital
expenditures will increase as our operations, infrastructure and personnel
grow. As of December 31, 2000 we had no material capital expenditure
commitments.
During 2000, our investing activities included purchases and maturities of
short-term and long-term investments. Net purchases of investments were
approximately $86.1 million during 2000. As of December 31, 2000, except for
our $500,000 investment in AlterEgo Networks in September 2000, we had not
invested in derivative securities or any other financial instruments that
involve a high level of complexity or risk. We expect that, in the future, cash
in excess of current requirements will continue to be invested in high credit
quality, interest-bearing securities.
During 2000, our investing activities included the acquisitions of Neonyoyo,
Metacode Technologies and Ajuba Solutions. The net cash paid in connection with
these acquisitions was $13.9 million.
23
Net cash provided by financing activities in 2000 was $157.8 million. Net
cash provided by financing activities primarily reflects the proceeds of
issuance of common stock as discussed below.
In February 2000, we completed our follow-on offering of 12,000,000 shares
of common stock at $40.25. We sold 4,000,000 shares and selling stockholders
sold 8,000,000 shares (reflecting subsequent stock splits). Net proceeds to us
were approximately $152.4 million.
As of December 31, 2000, our sources of liquidity consisted of approximately
$222 million in cash, cash equivalents and investments and $200 million in
working capital. We have a $5.0 million line of credit with Silicon Valley
Bank, which bears interest at the bank's prime rate, which was 9.5% at December
31, 2000. As of December 31, 2000, the line of credit was unused. The line of
credit is secured by all of our tangible and intangible assets, and requires
that we maintain minimum quarterly unrestricted cash, cash equivalents and
short term investments, among other things. We intend to maintain the line of
credit. As of December 31, 2000, we were in compliance with all related
financial covenants and restrictions under the line of credit.
We believe that the current cash, cash equivalents, investments and funds
available under existing credit facilities, will be sufficient to meet our
working capital requirements for at least the next 12 months. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise additional funds through public or private
equity financing or from other sources. There can be no assurance that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on our business,
financial condition and operating results.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies the
application of Opinion 25 for the definition of employee for purposes of
applying Opinion 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. We adopted
FIN 44 effective July 1, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarizes certain aspects of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In 2000, the Securities and Exchange Commission issued SAB 101A and SAB 101B,
which extend the transition provision of SAB 101 to December 31, 2001 for a
calendar year company. The adoption of SAB 101 has not had a material impact on
our consolidated financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the effective date of
SFAS No. 133," which deferred the effective date until the first fiscal year
ending on or after June 30, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities
an Amendment of SFAS No. 133." SFAS No. 133 requires that all derivative
instruments be recognized at fair value as either assets or liabilities in the
statement of financial position. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship, and on the
type of hedging relationship. We will adopt SFAS No. 133, as amended, in the
quarter ending March 31, 2001.
24
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus
with respect to EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal
Versus Net as an Agent." EITF 99-19 addresses whether a company should report
revenue based on the gross amount billed to a customer because it has earned
revenue from the sale of the goods or services or the net amount retained (that
is, the amount billed to the customer less the amount paid to a supplier)
because it has earned a commission or fee. We have adopted EITF 99-19, and this
adoption did not have a material impact on our consolidated financial
statements.
In March 2000, the EITF reached a consensus on EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement and income statement classification of sales
incentives which are offered voluntarily by a vendor without charge to
customers that can be used in, or that are exercisable by a customer as a
result of, a single exchange transaction. We evaluated the provisions of the
EITF and concluded that it will not impact our consolidated financial
statements.
In July 2000, the EITF issued EITF Issue No. 00-15 "Classification in the
Statement of Cash Flows of the Income Tax Benefit Realized by a Company upon
Employee Exercise of a Non-qualified Stock Option." EITF 00-15 addresses the
cash flow statement presentation of the tax benefit associated with
nonqualified stock options. A company receives an income tax deduction for the
difference between the exercise price and the market price of a nonqualified
stock option upon exercise by the employee. EITF 00-15 concludes that the
income tax benefit realized by our company upon employee exercise should be
classified in the operating section of the cash flow statement. The EITF is
effective for all quarters ending after July 20, 2000. We have adopted EITF 00-
15, and such adoption did not have a material impact on our consolidated
financial statements.
In July 2000, the EITF issued EITF Issue No. 00-16 "Recognition and
Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation."
EITF 00-16 addresses how an entity should account for employer payroll taxes on
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and SFAS No. 123, "Accounting for
Stock-Based Compensation." It addresses the timing for recognition of the
payroll tax liability and requires that this liability be recognized when the
tax obligation is triggered. We adopted EITF 00-16 effective July 31, 2000, and
such adoption did not have a material impact on our consolidated financial
statements.
25
FACTORS AFFECTING FUTURE RESULTS
The risks and uncertainties described below are not the only risks we face.
These risks are the ones we consider to be significant to your decision whether
to invest in our common stock at this time. We might be wrong. There may be
risks that you in particular view differently than we do, and there are other
risks and uncertainties that we do not presently know or that we currently deem
immaterial, but that may in fact harm our business in the future. If any of
these risks occur, our business, results of operations and financial condition
could be seriously harmed, the trading price of our common stock could decline
and you may lose all or part of your investment.
In addition to other information in this Annual Report on Form 10-K, the
following factors should be considered carefully in evaluating Interwoven and
our business.
Our operating history is limited, so it will be difficult for you to
evaluate our business in making an investment decision.
We were incorporated in March 1995 and have a limited operating history. We
are still in the early stages of our development, which makes the evaluation of
our business operations and our prospects difficult. We shipped our first
product in May 1997. Since that time, we have derived substantially all of our
revenues from licensing our TeamSite product and related products and services.
In evaluating our common stock, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those companies whose businesses depend on the Internet.
These risks and difficulties, as they apply to us in particular, include:
. potential fluctuations in operating results and uncertain growth rates;
. limited market acceptance of our products;
. concentration of our revenues in a single product or family of products;
. our dependence on an increasing number of large orders;
. our need to expand our direct sales forces and indirect sales channels;
. our need to manage rapidly expanding operations;
. our need to attract, train and retain qualified personnel;
. our need to establish and maintain strategic relationships with other
companies, some of whom may in the future become our competitors;
. our need to expand internationally;
. our ability to integrate acquired businesses and technologies;
. delay or deferral of customer implementations of our products;
. the size and timing of individual license transactions;
. the appropriate mix of products and services sold;
. our ability to develop and market new products and control costs; and
. changes in the economy and foreign exchange rates.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue
and operating results to fluctuate significantly. Based upon the preceding
factors, we may experience a shortfall in revenue or earnings or otherwise fail
to meet public market expectations, which could materially adversely affect our
business, financial condition and the market price of our common stock.
26
If we do not increase our license revenues significantly, we will fail to
achieve and sustain operating profitability.
We have incurred net losses from operations in each quarter since our
inception through the quarter ended September 30, 2000. Our net losses amounted
to $6.3 million in 1998, $15.7 million in 1999 and $32.1 million in 2000. As of
December 31, 2000, we had an accumulated deficit of approximately
$58.0 million. We plan to expand our sales and marketing, research and
development, and professional services organizations. As a result, if we are to
sustain operating profitability on a quarterly and annual basis, we will need
to increase our revenues significantly, particularly our license revenues. We
cannot predict when we will become profitable, if at all.
Our operating results fluctuate widely and are difficult to predict, so we may
fail to satisfy the expectations of investors or market analysts and our stock
price may decline.
Our quarterly operating results have fluctuated significantly in the past,
and we expect them to continue to fluctuate unpredictably in the future. The
main factors that may affect these fluctuations are:
. the discretionary nature of our customer's purchase and budget cycles;
. the size and complexity of our license transactions;
. potential delays in recognizing revenue from license transactions;
. timing of new product releases;
. sales force capacity;
. seasonal variations in operating results; and
. variations in the fiscal or quarterly cycles of our customers.
It is possible that in some future periods our results of operations may not
meet or exceed the forecasts periodically disclosed by management or the
expectations of public market analysts and investors. If this occurs, the price
of our common stock is likely to decline. Further, we anticipate that our
sequential percentage rate of revenue growth will decline in future quarters in
part because of the difficulty of maintaining high growth rates calculated off
progressively larger base revenue numbers.
Since large orders are increasingly important to us, our quarterly results are
subject to wide fluctuation.
We derive a significant portion of our license revenues from relatively
large orders. We expect the percentage of larger orders as related to total
orders to increase. This dependence on large orders makes our net revenue and
operating results more likely to vary from quarter to quarter because the loss
of any particular large order is significant.
As a result, our operating results could suffer if any large orders are
delayed or cancelled in any future period. In the first, second, third and
fourth quarters of 2000, our top five customers accounted for 17%, 39%, 30% and
23% respectively, of the total license revenue in those quarters. We expect
that we will continue to depend upon a small number of large orders for a
significant portion of our license revenues.
We face significant competition, which could make it difficult to acquire and
retain customers and inhibit any future growth.
We expect the competition in the market in which we operate to persist and
intensify in the future. Competitive pressures may seriously harm our business
and results of operations if they inhibit our future growth, or require us to
hold down or reduce prices, or increase our operating costs. Our competitors
include, but are not limited to:
. potential customers that use in-house development efforts;
. developers of software that directly addresses the need for web content
management, such as Documentum, Eprise, Filenet, Intranet Solutions,
Rational Software and Vignette.
27
We also face potential competition from our strategic partners or from other
companies, such as Microsoft, Oracle or IBM, that may in the future decide to
enter our market. Many of our existing and potential competitors have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
Many of these companies can also leverage extensive customer bases and adopt
aggressive pricing policies to gain market share. Potential competitors may
bundle their products in a manner that discourages users from purchasing our
products. Barriers to entering the web content management software market are
relatively low.
Although we believe the number of our competitors is increasing, we believe
there may be consolidation in the web content management software industry. We
expect that the general downturn of stock prices in the Internet and technology
industries since March 2000 will result in significant acceleration of this
trend, with fewer but more financially sound competitors surviving that are
better able to compete with us for our current and potential customers.
If we fail to establish and maintain strategic relationships, the market
acceptance of our products, and our profitability, may suffer.
To offer products and services to a larger customer base our direct sales
force depends on strategic partnerships and marketing alliances to obtain
customer leads, referrals and distribution. If we are unable to maintain our
existing strategic relationships or fail to enter into additional strategic
relationships, our ability to increase our sales and reduce expenses will be
harmed. We would also lose anticipated customer introductions and co-marketing
benefits. Our success depends in part on the success of our strategic partners
and their ability to market our products and services successfully. We also
rely on our strategic partnerships to aid in the development of our products.
Should our strategic partners not regard us as significant for their own
businesses, they could reduce their commitment to us or terminate their
respective relationships with us, pursue other partnerships or relationships,
or attempt to develop or acquire products or services that compete with our
products and services. Even if we succeed in establishing these relationships,
they may not result in additional customers or revenues.
Because the market for our products is new, we do not know whether existing and
potential customers will purchase our products in sufficient quantity for us to
achieve profitability.
The market for web content management software in which we sell is new and
rapidly evolving. We expect that we will continue to need intensive marketing
and sales efforts to educate prospective clients about the uses and benefits of
our products and services. Various factors could inhibit the growth of the
market, and market acceptance of our products and services. In particular,
potential customers that have invested substantial resources in other methods
of conducting business over the Internet may be reluctant to adopt a new
approach that may replace, limit or compete with their existing systems. We
cannot be certain that a viable market for our products will continue to
expand.
The recent economic downturn may reduce our sales and may cause us to
experience operating losses.
In recent months many signs have pointed to widespread economic slowdowns in
the markets we serve. Capital spending in general and capital spending on web
initiatives in particular may decline. This trend could harm our sales if it
results in order cancellations or delays, and the longer the trend continues
the more harm our sales will suffer. In addition, since many of our customers
may be suffering adverse effects of the general economic slowdown, we may find
that collecting accounts receivable from existing or new customers will take
longer than we expect or that some accounts receivable will become
uncollectable.
28
Acquisitions may harm our business by being more difficult than expected to
integrate, by diverting management's attention or by subjecting us to
unforeseen accounting problems.
As part of our business strategy, we may seek to acquire or invest in
additional businesses, products or technologies that we feel could complement
or expand our business. If we identify an appropriate acquisition opportunity,
we might be unable to negotiate the terms of that acquisition successfully,
finance it, develop the intellectual property acquired from it or integrate it
into our existing business and operations. We may also be unable to select,
manage or absorb any future acquisitions successfully. Further, the negotiation
of potential acquisitions, as well as the integration of an acquired business,
especially if it involved our entering a new market, would divert management
time and other resources and put us at a competitive disadvantage. We may have
to use a substantial portion of our available cash, including proceeds from
public offerings, to consummate an acquisition. On the other hand, if we
consummate acquisitions through an exchange of our securities, our stockholders
could suffer significant dilution. In addition, we cannot assure you that any
particular acquisition, even if successfully completed, will ultimately benefit
our business.
In connection with our acquisitions, we may be required to write off
software development costs or other assets, incur severance liabilities,
amortization expenses related to goodwill and other intangible assets, or incur
debt, any of which could harm our business, financial condition, cash flows and
results of operations. The companies we acquire may not have audited financial
statements, detailed financial information, or adequate internal controls.
There can be no assurance that an audit subsequent to the completion of an
acquisition will not reveal matters of significance, including with respect to
revenues, expenses, contingent or other liabilities, and intellectual property.
Any such write off could harm our financial results.
Our lengthy sales cycle makes it particularly difficult for us to forecast
revenue, requires us to incur high costs of sales, and aggravates the
variability of quarterly fluctuations.
The time between our initial contact with a potential customer and the
ultimate sale, which we refer to as our sales cycle, typically ranges between
three and nine months depending largely on the customer. If we do not shorten
our sales cycle, it will be difficult for us to reduce sales and marketing
expenses. In addition, as a result of our lengthy sales cycle, we have only a
limited ability to forecast the timing and size of specific sales. This makes
it more difficult to predict quarterly financial performance, or to achieve it,
and any delay in completing sales in a particular quarter could harm our
business and cause our operating results to vary significantly.
We rely heavily on sales of one product, so if it does not continue to achieve
market acceptance we are likely to experience operating losses.
Since 1997, we have generated substantially all of our revenues from
licenses of, and services related to, our TeamSite product. We believe that
revenues generated from TeamSite will continue to account for a large portion
of our revenues for the foreseeable future. A decline in the price of TeamSite,
or our inability to increase license sales of TeamSite, would harm our business
and operating results more seriously than it would if we had several different
products and services to sell. In addition, our future financial performance
will depend upon successfully developing and selling enhanced versions of
TeamSite. If we fail to deliver product enhancements or new products that
customers want it will be more difficult for us to succeed.
We depend on our direct sales force to sell our products, so future growth will
be constrained by our ability to hire, train and retain sales personnel.
We sell our products primarily through our direct sales force, and we expect
to continue to do so in the future. Our ability to sell more products is
limited by our ability to hire, train and retain direct sales personnel, and we
believe that there is significant competition for direct sales personnel with
the advanced sales skills and technical knowledge that we need. Some of our
competitors may have greater resources to hire or retain personnel with that
skill and knowledge. If we are not able to hire or retain experienced and
competent sales personnel, our business would be harmed. Furthermore, because
we depend on our direct sales force, any
29
turnover in our sales force can significantly harm our operating results. Sales
force turnover tends to slow sales efforts until replacement personnel can be
recruited and trained to become productive. See "--We must attract and retain
qualified personnel, which is particularly difficult for us because we compete
with other Internet-related software companies and are located in the San
Francisco Bay area, where competition for personnel is extremely intense."
If we do not continue to develop our indirect sales channel, we will be less
likely to increase our revenues.
If we do not develop indirect sales channels, we may miss sales
opportunities that might be available through these channels. For example,
domestic and international resellers may be able to reach new customers more
quickly or more effectively than our direct sales force. Our investment of
resources to develop indirect sales channels may not succeed in establishing a
channel that can market our products effectively and provide timely and cost-
effective customer support and services. In addition, we may not be able to
manage conflicts across our sales channels, and our focus on increasing sales
through our indirect channel may divert management resources and attention from
direct sales.
We must attract and retain qualified personnel, which is particularly difficult
for us because we compete with other Internet-related software companies and
are located in the San Francisco Bay area, where competition for personnel is
extremely intense.
Our success depends on our ability to attract and retain qualified,
experienced employees. We compete for experienced engineering, sales and
consulting personnel with Internet professional services firms, software
vendors, consulting and professional services companies. It is also
particularly difficult to recruit and retain personnel in the San Francisco Bay
area, where we are located. Although we provide compensation packages that
include incentive stock options, cash incentives and other employee benefits,
the volatility and current market price of our common stock may make it
difficult for us to attract, assimilate and retain highly qualified employees
in the future. In addition, our customers generally purchase consulting and
implementation services. While we have recently established relationships with
some third-party service providers, we continue to be the primary provider of
these services. It is difficult and expensive to recruit, train and retain
qualified personnel to perform these services, and we may from time to time
have inadequate levels of staffing to perform these services. As a result, our
growth could be limited due to our lack of capacity to provide those services,
or we could experience deterioration in service levels or decreased customer
satisfaction, any of which would harm our business.
If we do not improve our operational systems on a timely basis, we will be more
likely to fail to manage our growth properly.
We have expanded our operations rapidly in recent years. We intend to
continue to expand our operational systems for the foreseeable future to pursue
existing and potential market opportunities. This rapid growth places a
significant demand on management and operational resources. In order to manage
our growth, we need to implement and improve our operational systems,
procedures and controls on a timely basis. If we fail to implement and improve
these systems in a timely manner, our business will be seriously harmed.
Difficulties in introducing new products and upgrades in a timely manner will
make market acceptance of our products less likely.
The market for our products is characterized by rapid technological change,
frequent new product introductions and Internet-related technology
enhancements, uncertain product life cycles, changes in customer demands and
evolving industry standards. We expect to add new content management
functionality to our product offerings by internal development, and possibly by
acquisition. Content management technology is more complex than most software,
and new products or product enhancements can require long development and
testing periods. Any delays in developing and releasing new products could harm
our business. New
30
products or upgrades may not be released according to schedule or may contain
defects when released. Either situation could result in adverse publicity, loss
of sales, delay in market acceptance of our products or customer claims against
us, any of which could harm our business. If we do not develop, license or
acquire new software products, or deliver enhancements to existing products on
a timely and cost-effective basis, our business will be harmed.
Our operating results suffer as a result of stock based compensation charges
and amortization of goodwill and other intangibles.
Under U.S. generally accepted accounting principles that apply to us, we
have accounted for the four business combinations since our inception using the
purchase method of accounting. Under purchase accounting, we recorded the
market value of our common shares issued in connection with mergers and
acquisitions with the fair value of the stock options assumed, which became
options to purchase our common shares and the amount of direct transaction
costs as the cost of acquiring these entities. That cost is allocated to the
individual assets acquired and liabilities assumed, including various
identifiable intangible assets such as goodwill in-process research and
development, acquired technology, acquired workforce and covenants not to
compete, based on their respective fair values. We have also recorded deferred
compensation liabilities related to options assumed and shares issued to effect
business combinations as well as options granted below fair market value
associated with our initial public offering in October 1999.
The amortization of intangibles and deferred stock based compensation
resulted in expenses of approximately $24.1 million and $7.5 million,
respectively, for 2000. The future amortization expense related to the
acquisitions and deferred stock based compensation liabilities may be
accelerated as management assesses the value and useful life of the intangible
assets.
If we were to reprice outstanding stock options held by our current
employees, we may be required to record a compensation charge on a quarterly
basis as a result of variable plan accounting treatment, which would lower our
earnings.
Our products might not be compatible with all major platforms, which could
limit our revenues.
Our products currently operate on the Microsoft Windows NT, Microsoft
Windows 2000, Linux, IBM AIX, Hewlett Packard UX and Sun Solaris operating
systems. In addition, our products are required to interoperate with leading
web content authoring tools and web application servers. We must continually
modify and enhance our products to keep pace with changes in these applications
and operating systems. If our products were to be incompatible with a popular
new operating system or Internet business application, our business would be
harmed. In addition, uncertainties related to the timing and nature of new
product announcements, introductions or modifications by vendors of operating
systems, browsers, back-office applications, and other Internet- related
applications, could also harm our business.
We have limited experience conducting operations internationally, which may
make it more difficult than we expect to continue to expand overseas and may
increase the costs of doing so.
To date, we have derived the majority of our revenues from sales to North
American customers. We have recently expanded our international operations.
There are many barriers to competing successfully in the international arena,
including:
. costs of customizing products for foreign countries;
. development of foreign language graphical user interface for development;
. restrictions on the use of software encryption technology;
. dependence on local vendors;
31
. compliance with multiple, conflicting and changing governmental laws and
regulations;
. longer sales cycles;
. revenue recognition criteria;
. foreign exchange fluctuations;
. import and export restrictions and tariffs; and
. negotiating and executing sales in a foreign language.
As a result of these competitive barriers, we cannot assure you that we will
be able to market, sell and deliver our products and services in international
markets.
If our services revenue does not grow substantially, our total revenue is
unlikely to increase.
Our services revenue represent a significant component of our total
revenue--21% of total revenue for 1998, 36% of total revenue for 1999 and 34%
of total revenue for 2000. We anticipate that services revenue will continue to
represent a significant percentage of total revenue in the future. To a large
extent, the level of services revenue depends upon our ability to license
products which generate follow-on services revenue. Additionally, services
revenue growth depends on ongoing renewals of maintenance and service
contracts. Moreover, as third-party organizations such as systems integrators
become proficient in installing or servicing our products, our services
revenues could decline. Our ability to increase services revenues will depend
in large part on our ability to increase the capacity of our professional
services organization, including our ability to recruit, train and retain a
sufficient number of qualified personnel.
We might not be able to protect and enforce our intellectual property rights, a
loss of which could harm our business.
We depend upon our proprietary technology, and rely on a combination of
patent, copyright and trademark laws, trade secrets, confidentiality procedures
and contractual provisions to protect it. We currently do not have any issued
United States or foreign patents, but we have applied for several U.S. patents.
It is possible that patents will not be issued from our currently pending
patent applications or any future patent application we may file. We have also
restricted customer access to our source code and required all employees to
enter into confidentiality and invention assignment agreements. Despite our
efforts to protect our proprietary technology, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. In addition, the laws of some foreign countries do not protect
our proprietary rights as effectively as the laws of the United States, and we
expect that it will become more difficult to monitor use of our products as we
increase our international presence. In addition, third parties may claim that
our products infringe theirs.
Our failure to deliver defect-free software could result in losses and harmful
publicity.
Our software products are complex and have in the past and may in the future
contain defects or failures that may be detected at any point in the product's
life. We have discovered software defects in the past in some of our products
after their release. Although past defects have not had a material effect on
our results of operations, in the future we may experience delays or lost
revenue caused by new defects. Despite our testing, defects and errors may
still be found in new or existing products, and may result in delayed or lost
revenues, loss of market share, failure to achieve acceptance, reduced customer
satisfaction, diversion of development resources and damage to our reputation.
As has occurred in the past, new releases of products or product enhancements
may require us to provide additional services under our maintenance contracts
to ensure proper installation and implementation. Moreover, third parties may
develop and spread computer viruses that may damage the functionality of our
software products. Any damage to or interruption in the performance of our
software could also harm our business.
32
Defects in our products may result in customer claims against us that could
cause unanticipated losses.
Because customers rely on our products for business critical processes,
defects or errors in our products or services might result in tort or warranty
claims. It is possible that the limitation of liability provisions in our
contracts will not be effective as a result of existing or future federal,
state or local laws or ordinances or unfavorable judicial decisions. We have
not experienced any product liability claims like this to date, but we could in
the future. Further, although we maintain errors and omissions insurance, this
insurance coverage may not be adequate to cover us. A successful product
liability claim could harm our business. Even defending a product liability
suit, regardless of its merits, could harm our business because it entails
substantial expense and diverts the time and attention of key management
personnel.
We have various mechanisms in place to discourage takeover attempts, which
might tend to suppress our stock price.
Provisions of our certificate of incorporation and bylaws that may
discourage, delay or prevent a change in control include:
. we are authorized to issue "blank check" preferred stock, which could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. we provide for the election of only one-third of our directors at each
annual meeting of stockholders, which slows turnover on the board of
directors;
. we limit who may call special meetings of stockholders;
. we prohibit stockholder action by written consent, so all stockholder
actions must be taken at a meeting of our stockholders; and
. we require advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon by stockholders
at stockholder meetings.
The location of our facilities subjects us to the risk of earthquakes and power
outages.
Our corporate headquarters, including most of our research and development
operations, are located in the Silicon Valley area of Northern California, a
region known for seismic activity. Additionally, California has experienced
power outages in the recent past. A significant disaster, such as an earthquake
or a prolonged power outage, could have a material adverse impact on our
business, operating results, and financial condition by disrupting our
employees' productivity or damaging our facilities.
Fluctuations in the exchange rates of foreign currency may harm our business.
We are exposed to adverse movements in foreign currency exchange rates
because we translate foreign currencies into U.S. Dollars for reporting
purposes. Historically, these risks were minimal for us, but as our
international revenue and operations have grown and continue to grow, the
adverse currency fluctuations could have a material adverse impact on our
financial results. Historically, our primary exposures have related to
operating expenses and sales in Australia, Asia and Europe that were not U.S.
Dollar denominated. The increasing use of the Euro as a common currency for
members of the European Union could affect our foreign exchange exposure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
short-term and long-term investments in a variety of securities, including both
government and corporate obligations and money market funds. As of December 31,
2000, 100% of our total portfolio matures in one year or less. See Note 1 of
Notes to Consolidated Financial Statements.
33
The following table presents the amounts of cash equivalents and short-term
investments that are subject to interest rate risk by year of expected maturity
and average interest rates as of December 31, 2000:
Fair
2001 Total Value
-------- -------- --------
(in thousands)
Cash equivalents and short-term
investments............................. $147,253 $147,253 $147,253
Average interest rates................... 6.0% 6.0%
The following table presents the amounts of cash equivalents and short-term
and long-term investments that are subject to interest rate risk by year of
expected maturity and average interest rates as of December 31, 1999:
2000 2001 Total Fair Value
------- ------- ------- ----------
Cash equivalents, short-term and
long-term investments............... $44,665 $16,464 $61,129 $61,129
Average interest rates............... 5.5% 6.0%
We did not hold derivative financial instruments as of December 31, 2000,
and have never held such instruments in the past. In addition, we had no
outstanding debt as of December 31, 2000.
Equity Price Risk
We are exposed to equity price risk on the marketable portion of equity
investments as such investments are subject to considerable market risk due to
their volatility. Interwoven typically does not attempt to reduce or eliminate
its market exposure in these equity investments. As of December 31, 2000, the
position in equity investments did not reflect any unrealized gain or loss
because the carrying value of the investments approximated their fair value.
Foreign Currency Risk
Currently the majority of our sales and expenses are denominated in U.S.
Dollars, as a result we have experienced no significant foreign exchange gains
and losses to date. While we do expect to execute transactions in foreign
currencies in 2001, we do not anticipate that foreign exchange gains or losses
will be significant. We have not engaged in foreign currency hedging activities
to date.
Commodity Price Risk
We did not hold commodity instruments as of December 31, 2000, and have
never had such instruments in the past.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted as a separate section of this Form
10-K. See Part IV, Item 14 of this Form 10-K for a listing of financial
statements presented in the section entitled "Financial Statements."
34
QUARTERLY CONSOLIDATED FINANCIAL DATA
Three Months Ended
--------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
Consolidated Statement
of Operations Data:
Revenues:
License................ $ 1,360 $ 1,898 $ 2,556 $ 4,892 $ 9,388 $15,421 $ 26,538 $ 35,659
Services............... 742 1,004 1,701 2,653 4,472 8,840 12,878 18,933
------- ------- ------- ------- ------- ------- -------- --------
Total revenues....... 2,102 2,902 4,257 7,545 13,860 24,261 39,416 54,592
Cost of revenues:
License................ 15 104 28 34 66 201 317 516
Services............... 549 880 2,113 3,034 4,654 7,908 11,610 14,369
------- ------- ------- ------- ------- ------- -------- --------
Total cost of
revenues............ 564 984 2,141 3,068 4,720 8,109 11,927 14,885
Gross profit............ 1,538 1,918 2,116 4,477 9,140 16,152 27,489 39,707
Operating expenses:
Research and
development........... 779 922 1,229 1,269 2,208 3,188 5,091 7,213
Sales and marketing.... 2,287 2,938 3,833 6,524 9,669 14,249 21,212 27,553
General and
administrative........ 598 646 833 1,143 1,960 2,808 3,708 5,465
Amortization of
deferred stock-based
compensation.......... 640 1,028 1,017 1,002 833 617 1,504 4,568
Amortization of
acquired intangible
assets................ -- -- 249 128 52 51 5,006 17,209
In process research &
development
writeoff.............. -- -- -- -- -- -- 1,724 100
------- ------- ------- ------- ------- ------- -------- --------
Total operating
expenses............ 4,304 5,534 7,161 10,066 14,722 20,913 38,245 62,108
------- ------- ------- ------- ------- ------- -------- --------
Loss from operations.... (2,766) (3,616) (5,045) (5,589) (5,582) (4,761) (10,756) (22,401)
Interest and other
income (expense), net.. 65 89 262 945 2,537 3,338 3,297 2,883
Provision for income
taxes.................. -- -- -- -- -- -- (227) (383)
------- ------- ------- ------- ------- ------- -------- --------
Net loss................ $(2,701) $(3,527) $(4,783) $(4,644) $(3,045) $(1,423) $ (7,686) $(19,901)
======= ======= ======= ======= ======= ======= ======== ========
Three Months Ended
--------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
Consolidated Statement
of Operations Data:
Revenues:
License................ 65 % 65 % 60 % 65 % 68 % 64 % 67 % 65 %
Services............... 35 35 40 35 32 36 33 35
------- ------- ------- ------- ------- ------- -------- --------
Total revenues....... 100 100 100 100 100 100 100 100
Cost of revenues:
License................ 1 4 1 1 -- 1 1 1
Services............... 26 30 49 40 34 32 29 26
------- ------- ------- ------- ------- ------- -------- --------
Total cost of
revenues............ 27 34 50 41 34 33 30 27
Gross profit............ 73 66 50 59 66 67 70 73
Operating expenses:
Research and
development........... 37 32 29 17 16 13 13 13
Sales and marketing.... 109 101 90 86 70 59 54 51
General and
administrative........ 28 22 19 15 14 12 9 10
Amortization of
deferred stock-based
compensation.......... 30 35 24 13 6 3 4 8
Amortization of
acquired intangible
assets................ -- -- 6 2 -- -- 13 32
In process research &
development
writeoff.............. -- -- -- -- -- -- 4 0
------- ------- ------- ------- ------- ------- -------- --------
Total operating
expenses............ 204 190 168 133 106 87 97 114
------- ------- ------- ------- ------- ------- -------- --------
Loss from operations.... (131) (124) (118) (74) (40) (20) (27) (41)
Interest and other
income (expense), net.. 3 3 6 13 18 14 8 5
Provision for income
taxes.................. -- -- -- -- -- -- (1) (1)
------- ------- ------- ------- ------- ------- -------- --------
Net loss................ (128)% (121)% (112)% (61)% (22)% (6)% (20)% (36)%
======= ======= ======= ======= ======= ======= ======== ========
35
As a result of our limited operating history and the emerging nature of the
market for web content management software and services in which we compete, it
is difficult for us to forecast our revenues or earnings accurately. It is
possible that in some future periods our results of operations may not meet or
exceed the expectations of public market analysts and investors. If this
occurs, the price of our common stock is likely to decline. Factors that have
caused our results to fluctuate in the past, and will likely cause fluctuations
in the future, include:
. the size of customer orders and the timing of product and service
deliveries;
. variability in the mix of products and services sold;
. our ability to retain our current customers and attract new customers;
. the amount and timing of operating costs relating to expansion of our
business, including our planned international expansion;
. the announcement or introduction of new products or services by us or our
competitors;
. our ability to attract and retain personnel, particularly management,
engineering and sales personnel and technical consultants;
. our ability to upgrade and develop our systems and infrastructure to
accommodate our growth; and
. costs related to acquisition of technologies or businesses.
In addition, our products are typically shipped when orders are received, so
license backlog at the beginning of any quarter in the past has represented
only a small portion of expected license revenues for that quarter. Moreover,
we typically recognize a substantial percentage of revenues in the last month
of the quarter, frequently in the last week or even the last days of the
quarter. As a result, at the beginning of a quarter we have no assurance about
the levels of sales in that quarter, and the delay or cancellation of any large
orders can result in a significant shortfall from anticipated revenues. These
factors make license revenues in any quarter difficult to forecast. Since our
expenses are relatively fixed in the near term, any shortfall from anticipated
revenues could result in significant variations in operating results from
quarter to quarter and harm to our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our results of operations may not be meaningful and should not
be relied upon as indicators of our future performance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information about directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934 that is required by this Item is incorporated
by reference to our proxy statement for our 2001 Annual Meeting of Stockholders
under the captions "Proposal No. 1--Election of Directors," and "Compliance
Under Section 16(a) of the Securities Exchange Act of 1934."
The following table presents information regarding our executive officers as
of December 31, 2000.
Name Age Position
---- --- --------
Martin W. Brauns..... 41 President, Chief Executive Officer and Director
Senior Vice President, Chief Financial Officer and
David M. Allen....... 42 Secretary
Senior Vice President, Worldwide Sales and Field
Michael A. Backlund.. 46 Operations
Jack S. Jia.......... 37 Senior Vice President, Engineering
Jozef Ruck........... 49 Senior Vice President, Marketing
John Van Siclen...... 44 Senior Vice President of Corporate Development and
Product Management
Gary L. Wimp......... 54 Vice President, Human Resources
Martin W. Brauns has served as President, Chief Executive Officer and
director of Interwoven since March 1998. Before joining Interwoven, Mr. Brauns
served as President and Chief Operating Officer of Sqribe Technologies, Inc., a
software company from July 1997 to November 1997. From 1996 to June 1997, Mr.
Brauns served in a number of positions, including most recently as Vice
President of North American Sales, at Informix Software, Inc. From 1992 to
1996, Mr. Brauns served as Vice President of Worldwide Sales of Adaptec Inc., a
hardware and software manufacturer. Mr. Brauns holds a Bachelor of Science in
international business and a Master of Business Administration from San Jose
State University.
David M. Allen has served as our Senior Vice President, Chief Financial
Officer and Secretary since July 2000. From March 1999 to July 2000, he served
as our Vice President and Chief Financial Officer. Before joining Interwoven,
Mr. Allen served as Vice President and Chief Financial Officer of Object
Systems Integrators, Inc., a telecommunications network management company,
from July 1996 to March 1999. From 1985 to July 1996, he served in a number of
positions, including most recently as Vice President and Chief Financial
Officer, at Telecommunications Techniques Corporation, a communications test
equipment manufacturing company. Mr. Allen holds a Bachelor of Science in
accounting from the University of Maryland.
Michael A. Backlund has served as our Senior Vice President of Worldwide
Sales and Field Operations since October 1999. From May 1998 to October 1999,
he served as our Vice President of Worldwide Sales. Prior to joining
Interwoven, from January 1997 to May 1998, Mr. Backlund served in a number of
positions at Computer Associates International, a software company, including
most recently as Vice President of Divisional Sales. In 1986, he founded CMS
Communications, Inc., a telecommunications equipment company, and from 1986 to
December 1996, he served in a number of capacities with CMS Communications,
including most recently as its Vice President of Sales and Marketing. Mr.
Backlund holds a Bachelor of Arts and a Master of Arts in economics from the
University of Southern California.
Jack S. Jia has served as our Senior Vice President of Engineering since
October 2000. From January 1997 to October 2000, he served in a variety of
positions, including most recently as our Senior Vice President of Engineering,
since joining Interwoven in January 1997. Prior to joining Interwoven, Mr. Jia
was a founder of V-Max America, Inc., a computer distribution company, and
served as the Chief Executive Officer from June 1993 to October 1998. From 1995
to January 1997, he served as a Project Manager at Silicon
37
Graphics, Inc., a computer systems company, and from 1993 to 1995, he served in
a number of senior engineering positions at Sun Microsystems, Inc., a computer
systems company. Mr. Jia holds a Bachelor of Science in electrical engineering
and a Master of Science in computer science from the Northern Jiao-Tong
University, Beijing, a Master of Science in electrical engineering from
Polytechnic University of New York, and a Master of Business Administration
from Santa Clara University.
Jozef Ruck has served as our Senior Vice President of Marketing since
October 2000. From January 2000 to October 2000, he served as our Vice
President of Corporate Channels Marketing, and from March 1999 to December
1999, he served as our Vice President of Marketing. Prior to joining
Interwoven, from April 1997 to April 1999, Mr. Ruck served in a number of
positions at Genesys Telecommunications Laboratories, a call center software
company, including most recently as Vice President of Customer Marketing. From
1994 to March 1997, he served in a number of positions, including most recently
as Western Region Sales Director, at Network Appliance, Inc., a data storage
company. Mr. Ruck holds a Bachelor of Science in mechanical engineering from
Oregon State University and a Master of Business Administration from Santa
Clara University.
John Van Siclen has served as our Senior Vice President of Corporate
Development and Product Management since July 2000. From December 1999 to July
2000, he served as our Vice President of Corporate Development. Prior to
joining Interwoven, Mr. Van Siclen served as President and Chief Executive
Officer of Perspecta, Inc., an Internet software company, from February 1997 to
November 1999. Perspecta was acquired by Excite@Home in October 1999. From 1996
to February 1997, Mr. Van Siclen served as Vice President, Alternate Channels
at Informix Software, Inc., a database software company. From 1990 to 1996, Mr.
Van Siclen held various sales and marketing management positions, including,
most recently, Vice President of Worldwide Sales and Marketing at NetFrame
Systems, a network systems company. Mr. Van Siclen holds a Bachelor of Arts in
history from Princeton University.
Gary Wimp has served as our Vice President of Human Resources since March
2000. Prior to joining Interwoven, Mr. Wimp was the President of Applied
Leadership, a management consulting firm, from 1994 to July 2000. Mr. Wimp
holds a Bachelor of Science in sociology from Regis University and a Master of
Science in human relations from Golden Gate University.
ITEM 11. EXECUTIVE COMPENSATION.
The information that is required by this Item is incorporated by reference
to our proxy statement for our 2001 Annual Meeting of Stockholders under the
caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information that is required by this Item is incorporated by reference
to our proxy statement for our 2001 Annual Meeting of Stockholders under the
caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information that is required by this Item is incorporated by reference
to our proxy statement for our 2001 Annual Meeting of Stockholders under the
caption "Certain Relationships and Related Transactions."
38
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
a) 1. Consolidated Financial Statements
The following consolidated financial statements are included in item 8 and
are filed as part of this Form 10-K:
. Consolidated Balance Sheets as of December 31, 1999 and 2000
. Consolidated Statement of Operations for each of the three years ended
December 31, 1998, 1999 and 2000
. Consolidated Statement of Changes in Stockholders' Deficit for each of
the three years ended December 31, 1998, 1999 and 2000.
. Consolidated Statement of Cash Flows for each of the three years ended
December 31, 1998, 1999 and 2000
. Notes to Consolidated Financial Statements
2. Financial Statements Schedule
Schedules not listed above have been omitted because they are not applicable
or required, or the information required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.
3. Exhibits
The following exhibits are filed as part of this report:
Incorporated by
Reference
-------------------- Filed
Number Exhibit Title Form Date Number Herewith
------ ------------- ---- -------- ------ --------
2.01 Agreement and Plan of Merger, dated S-1 07/27/99 2.01
October 1, 1999, between Interwoven,
Inc., a California corporation, and the
Registrant
2.02 Agreement and Plan of Merger by and 8-K 08/02/00 2.01
among the Registrant, Neonyoyo, Inc.
and Agnes Pak, dated July 10, 2000.
2.03 Agreement and Plan of Merger dated 8-K 11/13/00 2.01
October 19, 2000 among Interwoven, Inc.
AJ Acquisition Corp. and Ajuba
Solutions, Inc.
2.04 Agreement and Plan of Merger dated 8-K 11/13/00 2.02
October 20, 2000 among Interwoven,
Inc., Melon Acquisition Corporation and
Metacode Technologies, Inc.
3.01 Registrant's Third Amended and Restated S-1 12/17/99 3.03
Certificate of Incorporation
3.02 Certificate of Amendment of the S-3 11/22/00 3.03
Registrant's Third Amended and Restated
Certificate of Incorporation
3.03 Registrant's Restated Bylaws, as S-1 07/27/99 3.04
amended
4.01 Form of Certificate for Registrant's S-1 07/27/99 4.01
common stock
4.02 Third Amended and Restated Investors' S-1 07/27/99 4.02
Rights Agreement, dated June 10, 1999
4.03 Form of Consent concerning the Third S-1 07/27/99 4.03
Amended and Restated Investors' Rights
Agreement dated June 10, 1999
39
Incorporated by
Reference
-------------------- Filed
Number Exhibit Title Form Date Number Herewith
------ ------------- ---- -------- ------ --------
4.04 Form of Amendment to Third Amended and S-1 12/17/99 4.04
Restated Investor's Rights Agreement,
dated June 10, 1999
10.01 Form of Indemnity Agreement between S-1 07/27/99 10.01
Registrant and each of its directors
and executive officers
10.02* 1996 Stock Option Plan and related S-1 07/27/99 10.02
agreements
10.03* 1998 Stock Option Plan and related S-1 07/27/99 10.03
agreements
10.04* 1999 Equity Incentive Plan S-8 01/24/01 4.01
10.05* Forms of Option Agreements and Stock S-1 07/27/99 10.04
Option Exercise Agreements related to
the 1999 Equity Incentive Plan
10.06* 1999 Employee Stock Purchase Plan S-8 01/24/01 4.03
10.07* Forms of Enrollment Form, Subscription S-1 07/27/99 10.05
Agreement, Notice of Withdrawal and
Notice of Suspension related to the
1999 Employee Stock Purchase Plan
10.08* 2000 Stock Incentive Plan S-8 09/26/00 4.01
10.09* Forms of Stock Option Agreement and S-8 06/22/00 4.03
Stock Option Exercise Agreements
related to the 2000 Stock Incentive
Plan
10.10 Regional Prototype Profit Sharing Plan S-1 07/27/99 10.06
and Trust/Account Standard Plan
Adoption Agreement AA #001
10.11* Employment Agreement between S-1 07/27/99 10.07
Interwoven, Inc. and Martin W. Brauns
dated February 27, 1998
10.12* Offer Letter to David M. Allen from S-1 07/27/99 10.08
Interwoven, Inc. dated February 12,
1999
10.13* Offer Letter to Michael A. Backlund S-1 07/27/99 10.09
from Interwoven, Inc. dated May 1, 1998
10.14* Offer Letter to Jack S. Jia from S-1 07/27/99 10.13
Interwoven, Inc. dated January 3, 1997
10.15* Offer Letter to Jozef Ruck from S-1 07/27/99 10.15
Interwoven, Inc. dated February 18,
1999
10.16* Secured Promissory Notes between S-1 07/27/99 10.18
Interwoven, Inc. and Jeffrey E.
Engelmann, dated as of April 19, 1999
10.17* Secured Promissory Notes between S-1 07/27/99 10.19
Interwoven, Inc. and Jozef Ruck, dated
as of April 21, 1999
10.18 Build-To-Suit Lease Agreement dated S-1 07/27/99 10.20
March 18, 1997 between Sunnyvale
Partners Limited Partnership and First
Data Merchant Services Corporation
10.19 Sublease dated April 24, 1998 between S-1 07/27/99 10.21
First Data Merchant Services
Corporation and Interwoven, Inc.
10.20 Loan and Security Agreement, dated S-1 07/27/99 10.22
October 1997, as amended, between
Interwoven, Inc. and Silicon Valley
Bank
40
Incorporated by
Reference
-------------------- Filed
Number Exhibit Title Form Date Number Herewith
------ ------------- ---- -------- ------ --------
10.21 Agreement and Plan of Reorganization, S-1 07/27/99 10.23
dated June 30, 1999, by and among
Interwoven, Inc., Lexington Software
Associates, Inc. and certain
stockholders of Lexington Software
Associates, Inc.
10.22+ Standard Sales Agreement effective as S-1 07/27/99 10.24
of July 28, 1999 between Registrant
and General Electric Company
10.23+ Preferred Stock Warrant to Purchase S-1 07/27/99 10.25
Shares of Series E Preferred Stock of
Registrant
10.24+ Amended and Restated Loan and Security S-1 07/27/99 10.26
Agreement dated June 24, 1999, between
Silicon Valley Bank and Registrant
10.25 Intellectual Property Security S-1 07/27/99 10.27
Agreement dated June 24, 1999, between
Silicon Valley Bank and Registrant
10.26* Amendment to Secured Promissory Note S-1 07/27/99 10.28
between Interwoven, Inc. and Jeffrey
E. Engelmann, dated as of October 5,
1999
10.27* Amendment to Secured Promissory Note S-1 07/27/99 10.29
between Interwoven, Inc. and Jozef
Ruck, dated as of October 5, 1999
10.28* Offer Letter to John Van Siclen from S-1 12/17/99 10.30
Interwoven, Inc. dated December 17,
1999
10.29 Assignment of Lease between beyond.com S-1 12/17/99 10.31
and Interwoven, Inc.
21.1 Subsidiaries of the Registrant X
23.1 Consent of PricewaterhouseCoopers LLP, X
independent accountants
- --------
* Management contract, compensatory plan or arrangement
+ Portions of this exhibit have been omitted pursuant to an order granting
confidential treatment.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Interwoven, Inc.
/s/ David M. Allen
Date: April 2, 2001 By: _________________________________
David M. Allen
Senior Vice President andChief
Financial Officer
Each person whose signature appears below constitutes and appoints Martin W.
Brauns and David M. Allen, and each of them, as his or her true and lawful
attorneys-in-fact, each with the power of substitution, for him or her in any
and all capacities, to sign amendments to this Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Martin W. Brauns President, Chief Executive April 2 , 2001
______________________________________ Officer (principal
Martin W. Brauns executive officer) and a
director
/s/ David M. Allen Senior Vice President and April 2, 2001
______________________________________ Chief Financial Officer
David M. Allen (principal financial
officer and principal
accounting officer)
Additional Directors:
Chairman of the Board
______________________________________
Peng T. Ong
/s/ Kathryn C. Gould Director April 2, 2001
______________________________________
Kathryn C. Gould
/s/ Mark C. Thompson Director April 2, 2001
______________________________________
Mark C. Thompson
/s/ Ronald E. F. Codd Director April 2, 2001
______________________________________
Ronald E. F. Codd
/s/ Anthony Zingale Director April 2, 2001
______________________________________
Anthony Zingale
42
FINANCIAL STATEMENTS
As required under Item 8 Financial Statement and Supplementary Data, the
Consolidated Financial Statements of the Registrant are provided in this
separate section. The Consolidated Financial Statements included in this
Section are as follows:
Financial Statement Description
Page
-----
. Consolidated Balance Sheet as of December 31, 1999 and 2000............ 45
. Consolidated Statement of Operations for each of the three years ended
December 31, 1998, 1999 and 2000....................................... 46
. Consolidated Statement of Stockholders' Equity (Deficit) for each of
the three years ended December 31, 1998, 1999 and 2000................. 47
. Consolidated Statement of Cash Flows for each of the three years ended
December 31, 1998, 1999 and 2000....................................... 48
. Notes to Consolidated Financial Statements............................. 49-64
43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Interwoven, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Interwoven, Inc. and its subsidiaries at December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 18, 2001
44
INTERWOVEN, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
December 31,
----------------
1999 2000
------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................... $10,983 $ 75,031
Short-term investments...................................... 44,665 147,253
Accounts receivable, net.................................... 5,158 36,806
Prepaid expenses............................................ 787 7,392
Other current assets........................................ 559 2,860
------- --------
Total current assets...................................... 62,152 269,342
Investments................................................... 16,464 --
Property and equipment, net................................... 3,145 14,889
Goodwill and other intangible assets, net..................... 416 238,502
Restricted cash............................................... 605 605
Other assets.................................................. 297 871
------- --------
$83,079 $524,209
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................................... $ 1,680 $ 9,918
Accrued liabilities.................................................. 4,120 25,411
Deferred revenue, current............................................ 1,939 34,529
-------- --------
Total current liabilities.......................................... 7,739 69,858
-------- --------
Commitments (Note 5)
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares
issued or outstanding; no shares authorized, issued or outstanding.. -- --
Common Stock, 100,000 and 500,000 shares authorized, respectively;
91,544 and 102,171 issued and outstanding........................... 23 27
Additional paid-in capital........................................... 106,214 539,969
Notes receivable from stockholders................................... (202) --
Deferred stock-based compensation.................................... (4,732) (27,627)
Accumulated deficit.................................................. (25,963) (58,018)
-------- --------
Total stockholders' equity......................................... 75,340 454,351
-------- --------
$ 83,079 $524,209
======== ========
See accompanying notes to consolidated financial statements.
45
INTERWOVEN, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
Revenues:
License........................................ $ 3,176 $ 10,706 $ 87,006
Services....................................... 827 6,100 45,123
------- -------- --------
Total revenues............................... 4,003 16,806 132,129
------- -------- --------
Cost of revenues:
License........................................ 59 181 1,100
Services....................................... 1,274 6,576 38,541
------- -------- --------
Total cost of revenues....................... 1,333 6,757 39,641
------- -------- --------
Gross profit..................................... 2,670 10,049 92,488
------- -------- --------
Operating expenses:
Research and development....................... 1,797 4,199 17,700
Sales and marketing............................ 4,817 15,582 72,683
General and administrative..................... 1,739 3,220 13,941
Amortization of deferred stock-based
compensation.................................. 812 3,687 7,522
Amortization of acquired intangible assets..... -- 377 22,318
Writeoff of in-process research and
development................................... -- -- 1,824
------- -------- --------
Total operating expenses..................... 9,165 27,065 135,988
------- -------- --------
Loss from operations............................. (6,495) (17,016) (43,500)
Interest and other income (expense), net......... 151 1,361 12,055
------- -------- --------
Income (loss) before income taxes................ (6,344) (15,655) (31,445)
Provision for income taxes....................... -- -- (610)
------- -------- --------
Net loss......................................... $(6,344) $(15,655) $(32,055)
======= ======== ========
Accretion of mandatorily redeemable convertible
preferred stock to redemption value............. (1,165) (13,227) --
------- -------- --------
Net loss attributable to common stockholders..... $(7,509) $(28,882) $(32,055)
======= ======== ========
Basic and diluted net loss per share (Note 1).... $ (0.71) $ (0.95) $ (0.35)
======= ======== ========
Shares used in computing basic and diluted net
loss per share.................................. 10,532 30,472 91,979
======= ======== ========
See accompanying notes to consolidated financial statements.
46
INTERWOVEN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Notes
Common Stock Additional Receivable Deferred
--------------- Paid-In from Stock-Based Accumulated
Shares Amount Capital Stockholders Compensation Deficit Total
------- ------ ---------- ------------ ------------ ----------- --------
Balance at December 31,
1997................... 9,732 $ 3 $ (243) $ (3) $ -- $ (3,491) $ (3,734)
Issuance of common stock
for cash and notes
receivable............. 9,904 2 387 (237) -- -- 152
Repurchase shares of
Series A mandatorily
redeemable convertible
preferred stock........ -- -- -- -- -- (473) (473)
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (1,165) -- -- -- (1,165)
Deferred stock-based
compensation........... -- -- 1,902 -- (1,902) -- --
Amortization of stock-
based compensation..... -- -- -- -- 812 -- 812
Net loss................ -- -- -- -- -- (6,344) (6,344)
------- ----- -------- ----- -------- -------- --------
Balance at December 31,
1998................... 19,636 5 881 (240) (1,090) (10,308) (10,752)
------- ----- -------- ----- -------- -------- --------
Common stock issued upon
initial public
offering, net of
issuance costs of
approximately $1.2
million................ 14,492 3 56,241 -- -- -- 56,244
Issuance of common stock
for cash and notes
receivable............. 7,692 3 1,904 (202) -- -- 1,705
Exercise of Series B
warrants into common
stock.................. 260 -- 114 -- -- -- 114
Mandatorily redeemable
convertible preferred
stock converted to
common stock........... 49,880 12 52,984 -- -- -- 52,996
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (13,227) -- -- -- (13,227)
Repurchase of common
stock.................. (416) -- (11) -- -- -- (11)
Note repayment.......... -- -- -- 240 -- -- 240
Deferred stock-based
compensation........... -- -- 7,328 -- (7,328) -- --
Amortization of stock-
based compensation..... -- -- -- -- 3,686 -- 3,686
Net loss................ -- -- -- -- -- (15,655) (15,655)
------- ----- -------- ----- -------- -------- --------
Balance at December 31,
1999................... 91,544 23 106,214 (202) (4,732) (25,963) 75,340
------- ----- -------- ----- -------- -------- --------
Common stock issued upon
follow-on offering, net
of issuance costs of
approximately
$1.0 million........... 4,000 1 152,388 -- -- -- 152,389
Issuance of common stock
for cash or services... 2,179 1 6,808 -- -- -- 6,809
Issuance of common stock
for acquisitions....... 4,394 2 244,132 -- -- -- 244,134
Exercise of Series B
warrants into common
stock.................. 54 -- 10 -- -- -- 10
Repayment of
stockholder's note..... -- -- -- 202 -- -- 202
Deferred stock-based
compensation........... -- -- 30,417 -- (30,417) -- --
Amortization of stock-
based compensation..... -- -- -- -- 7,522 -- 7,522
Net loss................ -- -- -- -- -- (32,055) (32,055)
------- ----- -------- ----- -------- -------- --------
Balance at December 31,
2000................... 102,171 $ 27 $539,969 $ -- $(27,627) $(58,018) $454,351
======= ===== ======== ===== ======== ======== ========
See accompanying notes to consolidated financial statements.
47
INTERWOVEN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Years Ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
Cash flows used in operating activities:
Net loss........................................ $(6,344) $(15,655) $(32,055)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 294 883 3,071
Amortization of deferred stock-based
compensation.................................. 812 3,686 7,522
Amortization of acquired intangible assets..... -- 377 22,318
Provisions for doubtful accounts............... 270 18 276
Issuance of common stock for services.......... -- 27 1,626
Writeoff of in-process research and
development................................... -- -- 1,824
Changes in assets and liabilities:
Accounts receivable............................ (2,535) (2,598) (31,119)
Prepaid expenses and other assets.............. (222) (1,383) (10,233)
Restricted cash................................ (605) -- --
Accounts payable............................... 271 351 (14)
Accrued liabilities............................ 1,304 3,368 24,242
Deferred revenue............................... 724 1,215 32,590
------- -------- --------
Net cash (used in) provided by operating
activities.................................. (6,031) (9,711) 20,048
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment.............. (1,723) (2,411) (13,760)
Purchases of investments........................ -- (73,116) (168,028)
Maturities of investments....................... -- 11,987 81,904
Cash paid for businesses acquired, net.......... -- -- (13,900)
------- -------- --------
Net cash used in investing activities........ (1,723) (63,540) (113,784)
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net.. 14,831 18,462 --
Repurchases of Series A preferred stock, net.... (632) -- --
Proceeds from exercise of Series B warrant into
common stock................................... -- 114 10
Proceeds from issuance of common stock.......... 149 1,677 5,183
Proceeds from issuance of common stock for
public offerings............................... -- 56,244 152,389
Repayment (issuance) of stockholders loans...... 3 240 202
Proceeds from bank borrowings................... 1,500 -- --
Repurchase of common stock...................... -- (11) --
Principal payments of debt and leases........... (94) (1,514) --
------- -------- --------
Net cash provided by financing activities.... 15,757 75,212 157,784
------- -------- --------
Net increase in cash and cash equivalents......... 8,003 1,961 64,048
Cash and cash equivalents at beginning of period.. 1,019 9,022 10,983
------- -------- --------
Cash and cash equivalents at end of period........ $ 9,022 $ 10,983 $75,031
======= ======== ========
Supplemental cash flow disclosures:
Cash paid for interest.......................... $ 41 $ 111 $ --
======= ======== ========
Supplemental non-cash activity:
Common stock issued for notes receivable........ $ 240 $ 202 $ --
======= ======== ========
See accompanying notes to consolidated financial statements.
48
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Interwoven, Inc. (the "Company") is a leading provider of software products
and services that help businesses and other organizations manage the
information that makes up the content of their web sites. In the Internet
industry this is often referred to as "web content management." Our flagship
software product, TeamSite, is designed to help customers develop, maintain and
extend large web sites that are essential to their businesses. The Company also
markets and sells its software products and services through its wholly owned
subsidiaries in the United Kingdom, Australia, Hong Kong, Germany, Japan,
Sweden and Canada.
Reincorporation
In June 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. Share and per share
information for each of the periods presented has been retroactively adjusted
to reflect the reincorporation.
Initial Public Offering
On October 14, 1999, the Company completed its initial public offering of
common stock. A total of 14,492,000 shares were sold by the Company at a price
of $4.25 per share. The offering resulted in net proceeds to the Company of
approximately $56.2 million, net of the underwriting discount of $4.3 million
and estimated offering expenses of $1.2 million. At the closing of the
offering, all issued and outstanding shares of the Company's Mandatorily
Redeemable Convertible Preferred Stock were converted into an aggregate of
49,880,000 shares of common stock.
Follow-on Offering
In February 2000, the Company completed its follow-on offering of 12,000,000
shares of common stock at $40.25 per share. The Company sold 4,000,000 shares
in this offering and selling stockholders sold 8,000,000 shares. Net proceeds
to the Company were $152.4 million.
Stock Splits
On June 1, 2000 the Company's Board of Directors approved a 2-for-1 stock
split of the outstanding shares of common stock in the form of a stock
dividend. These shares were distributed on July 13, 2000. On December 12, 2000
the Company's Board of Directors approved a 2-for-1 stock split of the
outstanding shares of common stock in the form of a stock dividend. The shares
were distributed on January 2, 2001. All share and per share information
included in these consolidated financial statements have been retroactively
adjusted to reflect these stock splits.
49
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock
The Company is authorized to issue 100,000,000 shares of $0.001 par value
common stock and 5,000,000 shares of $0.001 par value preferred stock. The
Board of Directors has the authority to issue undesignated preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all significant
intercompany accounts and transactions.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Revenue recognition
In October 1997 and March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP No. 97-2") and Statement of Position No. 98-4, "Deferral of
the Effective Date of a Provision of SOP No. 97-2" ("SOP No. 98-4"). SOP 98-4
deferred for one year the application of certain provisions of SOP 97-2. In
December 1998, the AICPA issued Statement of Position No. 98-9, "Modification
of SOP No. 97-2 with Respect to Certain Transactions" ("SOP No. 98-9"), which
is effective for transactions entered into beginning April 1, 1999. SOP 98-9
extends the effective date of SOP 98-4 and provides additional interpretive
guidance. The adoption of SOP 97-2, SOP 98-4 and SOP 98-9 did not have a
material impact on the Company's results of operations, financial position or
cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain aspects of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In 2000, the Securities and Exchange Commission issued
SAB 101A, and SAB 101B, which extends the transition provision of SAB 101 to
December 31, 2001 for a calendar year company. The adoption of SAB 101 has not
had a material impact on the Company's results of operations, financial
position or cash flows.
The Company's revenues are derived from licenses of its software products
and from services the Company provides to its customers. Revenues are
recognized for the various contract elements based upon vendor-specific
objective evidence of fair value of each element, except for license revenue
which is reflected under the residual method.
License revenues are recognized when persuasive evidence of an agreement
exists, the product has been delivered, no significant post-delivery
obligations remain, the license fee is fixed or determinable and collection of
the fee is probable. The Company does not offer product return rights to
resellers or end users.
Services revenues consist of professional services and maintenance fees.
Professional services primarily consists of software installation and
integration, business process consulting and training. Professional services
are billed on a time and materials basis and revenues are recognized as the
services are performed. Maintenance agreements are typically priced based on a
percentage of the product license fee and have a one-year term, renewable
annually. Services provided to customers under maintenance agreements include
technical
50
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
product support and unspecified product upgrades. Deferred revenues from
advanced payments for maintenance agreements are recognized ratably over the
term of the agreement, which is typically one year.
The Company expenses all manufacturing, packaging and distribution costs
associated with software license sales as cost of goods sold.
The Company accrues product warranty claims based upon management's best
estimate of such claims as of the date revenue is recognized.
Cash, cash equivalents, and investments
The Company considers all highly liquid investments with a maturity from the
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of cash on deposit with banks and high quality
money market instruments. All other liquid investments are classified as either
short-term or long-term investments. Short-term investments and long-term
investments consist of commercial paper and corporate bonds.
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At December 31, 2000, all investment securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, using available market information and appropriate valuation
methodologies, with unrealized gains and losses reported in stockholders'
equity. As of December 31, 1999 and 2000 the difference between the fair value
and the amortized cost of available-for-sale securities was insignificant;
therefore, no unrealized gains or losses were recorded in stockholders' equity.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in the statement of
operations. There there were no realized gains and losses in 1999 and 2000. The
cost of securities sold is based on the specific identification method.
Interest on securities classified as available-for-sale are included in
interest income within the consolidated statement of operations.
At December 31, 2000, the Company's available-for-sale securities consisted
of commercial paper $20.5 million, corporate notes $23.1 million, corporate
bonds $47.4 million, medium term notes $5.2 million, municipal bonds $1.5
million, United States government agencies $45.0 million and money market funds
$79.5 million. Of these securities, $74.9 million and $147.3 million were
classified as cash equivalents and short-term investments, respectively.
Concentration of credit risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist primarily of cash and cash equivalents,
short-term and long-term investments and accounts receivable. The Company
limits its exposure to credit loss by placing its cash, cash equivalents and
short term investments with major financial institutions. The Company's
accounts receivable are derived from revenues earned from customers located in
the U.S. and abroad and are primarily denominated in U.S. Dollars. The Company
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon expected collectibility
of accounts receivable.
During 1998, 1999 and 2000 there were no customers whose revenues were in
excess of 10% of total revenues. At December 31, 1999 and 2000 no customer
accounted for 10% of total accounts receivable.
51
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of instruments
The Company's financial instruments including cash and cash equivalents,
short-term investments, long-term investments, accounts receivable and accounts
payable, are carried at cost, which approximate fair value due to the short-
term maturity of these instruments.
Software development costs
Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs since its inception.
Capitalization of internal-use software costs
The Company recognizes costs of software developed or purchased for internal
use in accordance with Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." As such, the Company
expenses all costs incurred that related to planning and post--implementation
phases of development. Costs incurred in the development and implementation
phase are capitalized and recognized over their estimated useful life, which
generally is three years. The amount of internal-use software costs capitalized
through December 31, 2000 totaled approximately $2.5 million. The unamortized
balance as of December 31, 2000 totaled approximately $1.7 million.
Property and equipment
Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the useful lives of the assets, generally five
years or less, or the shorter of the lease term or the estimated useful lives
of the assets, if applicable.
Impairment of long-lived assets
The Company evaluates the recoverability of its long-lived assets, including
goodwill, in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires recognition of impairment of
long-lived assets in the event that events or circumstances indicate an
impairment may have occurred and when net book value of such assets exceeds the
future undiscounted cash flows attributed to such assets.
Advertising costs
The Company accounts for advertising cost as expense in the period in which
they are incurred. However, the company does advertise extensively. Advertising
expense for the years ended December 31, 1998, 1999 and 2000 was $0, $115,000
and $344,000, respectively.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
52
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under APB 25, compensation expense is based on the difference, if any, on the
date of grant between fair value of the Company's stock and the exercise price.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus on
Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss attributed to common stockholders
for the period by the weighted average number of shares of common stock
outstanding during the period excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase aggregated
6,949,740, 8,619,116 and 11,509,000 as of December 31, 1998, 1999 and 2000,
respectively.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
Years Ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
Numerator:
Net loss attributable to common
stockholders............................... $(7,509) $(28,882) $(32,055)
Denominator:
Weighted average shares..................... 15,796 35,900 95,857
Weighted average unvested shares of common
stock subject to repurchase................ (5,264) (5,428) (3,878)
------- -------- --------
Denominator for basic and diluted
calculation................................ 10,532 30,472 91,979
------- -------- --------
Net loss per share:
Basic and diluted........................... $ (0.71) $ (0.95) $ (0.35)
53
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods indicated (in thousands):
Years Ended
December 31,
-------------------
1998 1999 2000
------ ----- ------
Weighted average effect of common stock equivalents.... 3,512 -- --
Series A preferred stock............................... 8,428 -- --
Series B preferred stock............................... 12,368 -- --
Series C preferred stock............................... 1,436 -- --
Warrants to purchase mandatorily redeemable convertible
preferred stock....................................... 284 -- --
Shares of common stock subject to repurchase........... 5,264 5,428 3,878
Common stock options................................... 7,480 2,180 9,128
------ ----- ------
38,772 7,608 13,006
====== ===== ======
Comprehensive income
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. As of December 31, 1999 and December 31, 2000, the Company had not had
any material transactions that were required to be reported in comprehensive
income.
Segment, Customer and Geographic Information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 superseded Statement No. 14
("SFAS 14"), "Financial Reporting for Segments of a Business Enterprise." SFAS
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. During the periods presented, the Company operated in a single
business segment. However, as the Company expands its product line and
increases its international operations, SFAS 131 may affect the Company's
disclosure in the future.
No customer accounted for more than 10% of revenue in 1998, 1999, or 2000.
Net revenue from international customers accounted for 0%, 0% and 19% of total
net revenue in 1998, 1999 and 2000, respectively. The majority of export sales
were made to Canada and Europe.
The following table presents revenue by geographic area:
Years ended December
31,
-----------------------
1998 1999 2000
------ ------- --------
Revenues:
Domestic operations.............................. $4,003 $16,806 $107,207
International operations......................... -- -- 24,922
------ ------- --------
Consolidated..................................... $4,003 $16,806 $132,129
====== ======= ========
54
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 effective July 1, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarizes certain aspects of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In 2000, the Securities and Exchange Commission issued SAB 101A and 101B, which
extends the transition provision of SAB 101 to December 31, 2001 for a calendar
year company. The adoption of SAB 101 has not had a material impact on the
Company's consolidated financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Board
Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In July 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of SFAS 133," which deferred the effective date until the
first fiscal year ending on or after June 30, 2000. In June 2000, the FASB
issued SFAS Statement No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities an Amendment of SFAS 133." SFAS 133 requires
that all derivative instruments be recognized at fair value as either assets or
liabilities in the statement of financial position. The accounting for changes
in the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. The Company will adopt SFAS
No. 133, as amended, in its quarter ending March 31, 2001.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus
with respect to EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal
Versus Net as an Agent." EITF 99-19 addresses whether a company should report
revenue based on the gross amount billed to a customer because it has earned
revenue from the sale of the goods or services or the net amount retained (that
is, the amount billed to the customer less the amount paid to a supplier)
because it has earned a commission or fee. The Company has adopted EITF 99-19,
and this adoption did not have a material impact on its consolidated financial
statements.
In March 2000, the EITF reached a consensus on EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement and income statement classification of sales
incentives which are offered voluntarily by a vendor without charge to
customers that can be used in, or that are exercisable by a customer as a
result of a single exchange transaction. The Company evaluated the provisions
of the EITF and concluded that it will not impact the Company's consolidated
financial statements.
55
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 2000, the EITF issued EITF Issue No. 00-15 "Classification in the
Statement of Cash Flows of the Income Tax Benefit Realized by a Company upon
Employee Exercise of a Non-qualified Stock Option." EITF 00-15 addresses the
cash flow statement presentation of the tax benefit associated with
nonqualified stock options. A company receives an income tax deduction for the
difference between the exercise price and the market price of a nonqualified
stock option upon exercise by the employee. EITF 00-15 concludes that the
income tax benefit realized by the company upon employee exercise should be
classified in the operating section of the cash flow statement. The EITF is
effective for all quarters ending after July 20, 2000. The Company has adopted
EITF 00-15 and such adoption did not have a material impact on its consolidated
financial statements.
In July 2000, the EITF issued EITF Issue No. 00-16 "Recognition and
Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation."
EITF 00-16 addresses how an entity should account for employer payroll taxes on
stock-based compensation under Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees," and SFAS No. 123, "Accounting for
Stock-Based Compensation." It addresses timing for recognition of the payroll
tax liability and requires that this liability it recognized when the tax
obligation is triggered. The Company adopted EITF 00-16 effective July 31,
2000, and such adoption did not have a material impact on its consolidated
financial statements.
Note 2--Acquisitions:
Effective July 1, 1999, the Company acquired all the assets and liabilities
of Lexington Software Associates Incorporated, which is a provider of
configuration management solutions and development methodologies, including
consulting and education. The acquisition has been accounted for using the
purchase method of accounting. The total purchase price for this acquisition
was approximately $800,000. The purchase price was allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values at the acquisition date. The purchase price consisted of
353,356 shares of the Company's Series E Preferred Stock (estimated fair value
of $500,000), seven-year warrants to purchase 70,672 shares of Series E
Preferred Stock at $1.415 per share (estimated fair value of $77,000) and
acquisition-related expenses (including legal and accountancy fees) of
approximately $223,000.
On July 18, 2000, the Company acquired all of the outstanding capital stock
of Neonyoyo in exchange for approximately $8.0 million in cash and
approximately 2,174,000 shares of its common stock. In addition, the Company
assumed options to purchase a total of 33,862 shares of its common stock in
exchange for all issued and outstanding Neonyoyo options and agreed to pay cash
upon the exercise of such assumed options.
On October 31, 2000, the Company acquired all of the outstanding capital
stock of Ajuba Solutions, Inc. in exchange for approximately 360,000 shares of
Interwoven common stock. In addition, the Company issued options to purchase a
total of approximately 218,000 shares of its common stock in exchange for all
issued and outstanding Ajuba options. The Company also paid approximately
$650,000 to Ajuba in connection with the acquisition.
On November 1, 2000, the Company acquired all of the outstanding capital
stock of Metacode Technologies, Inc. in exchange for approximately 1,860,000
shares of its common stock. In addition, the Company issued options to purchase
a total of 914,000 shares of its common stock in exchange for all issued and
outstanding Metacode options and the Company also paid approximately $5.3
million to Metacode in connection with the acquisition.
56
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts and components of the purchase price, and the allocation of the
purchase price to assets acquired, were as follows (in thousands):
Lexington Ajuba Metacode
Software Neonyoyo Solutions Technologies
--------- -------- --------- ------------
Components of purchase price
Net cash........................... $ -- $ 8,000 $ 650 $ 5,250
Equity............................. 577 76,311 21,061 114,049
Incremental fair value of stock
options assumed................... -- 6 2,094 30,613
Transaction costs.................. 223 1,967 1,105 2,601
----- ------- ------- --------
Total purchase price........... $ 800 $86,284 $24,910 $152,513
===== ======= ======= ========
Allocation of purchase price
Tangible assets.................... $ 385 $ 1,091 $ 2,073 5,206
Intangible assets..................
Workforce........................ 500 582 1,480 1,700
Goodwill......................... 300 75,983 25,733 143,473
Assumed liabilities.............. (385) (25) (4,376) (566)
In-process research and
development..................... -- 1,724 -- 100
Covenants not to compete......... -- 6,929 -- --
Completed technology............. -- -- -- 2,600
----- ------- ------- --------
Net assets acquired............ $ 800 $86,284 $24,910 $152,513
===== ======= ======= ========
The following unaudited pro forma financial data representing the results of
operations had the entities been combined with Interwoven for the years ended
December 31, 1999 and 2000 includes the straight-line amortization of
intangibles over a period of two to four years and excludes the charges for in-
process research and development (in thousands, except per share amounts).
Years Ended
December 31,
--------------------
1999 2000
--------- ---------
Revenue............................................ $ 19,471 $ 79,573
Net loss........................................... $(143,032) $(135,663)
Weighted average common shares..................... 67,556 92,476
Net loss per share................................. $ (2.12) $ (1.47)
The Company recorded deferred compensation liabilities of $288 million
related to the assumption of the options and exchange of the Company's shares
in the acquisitions. Amortization of the deferred compensation was $4.8 million
for the year ended December 31, 2000.
The acquisition of Lexington Software Associates, Neonyoyo, Ajuba Solutions
and Metacode Technologies were structured as tax-free acquisitions of stock.
Therefore, the differences between the recognized fair values of acquired net
assets and their historical tax bases are not deductible for tax purposes. A
deferred tax liability has been recognized for the differences between assigned
fair values of intangibles for book purposes and the tax bases of such assets.
57
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Balance sheet components (in thousands):
December 31,
---------------
1999 2000
------ -------
Accounts receivable, net:
Accounts receivable..................................... $5,446 $37,370
Less: Allowance for doubtful accounts................... (288) (564)
------ -------
$5,158 $36,806
====== =======
There were write-offs against the allowance for doubtful accounts in the
amount of $0, $0 and $287,000 in the years ended December 31, 1998, 1999 and
2000 .
December 31,
---------------
1999 2000
------ -------
Property and equipment, net:
Computer equipment and software......................... $2,944 $13,871
Furniture and fixtures.................................. 953 2,651
Leasehold improvements.................................. 501 2,691
------ -------
4,398 19,214
Less: Accumulated depreciation and amortization......... (1,253) (4,324)
------ -------
$3,145 $14,889
====== =======
Property and equipment includes $0 and $0 of fixed assets under capital
leases at December 31, 1999 and 2000, respectively.
December 31,
-----------------
1999 2000
---- --------
Goodwill and Other Intangible assets, net:
Goodwill............................................... $245 $227,039
Acquired workforce..................................... 171 3,486
Covenants not to compete............................... -- 5,485
Completed technology................................... -- 2,492
---- --------
$416 $238,502
==== ========
December 31,
--------------
1999 2000
------ -------
Accrued liabilities:
Payroll and related expenses............................. $3,506 $16,893
Accrued acquisition and professional fees................ 132 3,009
Other.................................................... 482 5,509
------ -------
$4,120 $25,411
====== =======
Note 4--Debt:
In June 1999, the Company amended a financing agreement (the "Financing
Agreement") originally entered into in June 1998, whereby the bank will loan up
to 80% of eligible accounts receivable up to a maximum of $3,000,000 for
working capital purposes. Working capital advances accrue interest at the
bank's prime rate and are payable monthly with principal due one year
subsequent to the date of any advance. The Financing Agreement provides for
additional borrowings of up to $2,000,000 to finance equipment purchases.
58
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advances for equipment purchases accrue interest at 0.25% plus the bank's prime
rate, which was 9.5% at December 31, 2000, and advances are payable monthly for
one year subsequent to the date of any advance. Thereafter, the outstanding
balance will be due in 36 monthly installments. The Financing Agreement
requires the Company to comply with certain financial covenants. The Company
was in compliance with all covenants under the Financing Agreement at December
31, 2000. On November 24, 1999, the Company repaid the Financing Agreement. The
amount repaid totaled approximately $1.3 million. There were no amounts
outstanding under the Financing Agreement as of December 31, 2000.
Note 5--Commitments:
The Company leases office space and equipment under non-cancellable
operating leases with various expiration dates through August 2003. Rent
expense for the year ended December 31, 1998, 1999 and 2000 totaled $557,000,
$1,341,182 and $5,555,386, respectively.
Future minimum lease payments under noncancelable operating leases, as of
December 31, 2000, are as follows (in thousands):
Operating Sublease
Year Ending December 31, Leases Income
------------------------ --------- --------
2001.................................................... $11,648 $1,012
2002.................................................... 11,167 1,048
2003.................................................... 9,315 724
2004.................................................... 5,737 --
2005.................................................... 4,882 --
Thereafter.............................................. 12,095 --
------- ------
Total minimum lease payments and sublease income........ $54,844 $2,784
======= ======
Restricted cash
During 1998, $605,000 of cash was pledged as collateral on an outstanding
letter of credit relating to the building lease agreement and is classified as
restricted cash on the balance sheet. The restricted cash will be reduced by
$226,875 on the 31st month after the signing of the agreement provided no event
of default has occurred. The Company was in compliance with all such covenants
at December 31, 1999 and December 31, 2000.
59
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Income Taxes:
The components of loss before taxes are as follows (in thousands):
Years Ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
United States................................. $(6,344) $(15,684) $(32,930)
Foreign....................................... -- 29 1,485
------- -------- --------
$(6,344) $(15,655) $(31,445)
======= ======== ========
The provision for income taxes is comprised of the following (in thousands):
Year Ended
December 31,
------------
2000
------------
Current:
Federal....................................................... $ 216
State......................................................... 409
Foreign....................................................... 584
------
1,209
======
Deferred:
Federal....................................................... (216)
State......................................................... (383)
------
(599)
------
Total provision............................................... $ 610
======
No provision for income taxes was recorded for 1998 and 1999 as the Company
had operating losses excluding non-cash and acquisition related charges for all
four quarters in each of these years.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows (in thousands):
Year Ended
December 31,
------------
2000
------------
Income tax benefit at the federal statutory rate of 34%...... $(10,691)
States taxes, net of federal tax benefits.................... 26
Non-deductible intangibles................................... 6,679
Research tax credits......................................... (601)
Timing differences not currently benefited................... 4,490
Other........................................................ 707
--------
$ 610
========
60
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
net deferred income tax assets are as follows (in thousands):
December 31,
-------------------------
1998 1999 2000
------- ------- -------
Deferred tax assets:
Net operating loss carryforwards................ $ 2,882 $ 6,319 $11,184
Accruals and reserves........................... 235 1,090 9,335
Research credits................................ 120 414 1,580
Depreciation.................................... 128 -- --
------- ------- -------
3,365 7,823 22,099
Valuation allowance............................... (3,365) (7,736) (21,316)
------- ------- -------
Net deferred tax assets........................... -- 87 783
Deferred tax liabilities:
Depreciation.................................... -- 19 184
Non-deductible intangible assets................ -- 68 --
------- ------- -------
Net deferred tax liabilities...................... -- 87 184
------- ------- -------
Net deferred tax assets........................... $ -- $ -- $ 599
======= ======= =======
As of December 31, 2000, the Company's federal and California net operating
loss carryforwards for income tax purposes were approximately $31.0 million and
$12.0 million, respectively. If not utilized, the federal net operating loss
carryforwards will begin to expire in 2011, and the California net operating
loss carryforwards will begin to expire in 2004. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amount of net operating loss that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than
50%, as defined, over a three year period. The Company's federal and California
research tax credit carryforwards for income tax purposes are approximately
$792,000 and $703,000, respectively. If not utilized, the federal tax credit
carryforwards will begin to expire in 2011.
Deferred tax assets of approximately $8.5 million as of December 31, 2000
pertain to certain net operating loss carryforwards resulting from the exercise
and disqualifying dispositions of employee stock options. When recognized, the
tax benefits of these loss carryforwards are accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax provision.
For financial reporting purposes, the Company has incurred losses in each
year since its inception. Based on the available objective evidence, management
believes that it is more likely than not that the net deferred tax assets will
not be fully realizable. Accordingly, the Company has provided for additional
valuation allowances of $2.1 million, $4.4 million and $13.6 million against
its net deferred tax assets for the years ended December 31, 1998, 1999 and
2000, respectively.
Note 7--Common Stock:
In March 1995, the Company issued 7,733,332 shares of common stock to its
founder in exchange for $14,500 in total consideration. Additionally, in March
1996, the Company issued 933,332 shares of common stock to an employee in
consideration of a $3,500 promissory note. In addition, the Company issued a
further 800,000 shares of common stock in consideration of $3,000 in cash.
Under the terms of the stock purchase agreements, the Company has the right to
repurchase up to 8,666,668 shares of such common stock at the
61
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
original issue price upon termination. The repurchase rights expired as to 25%
of such common stock in January 1997 and the remainder expired ratably over a
36 month period thereafter with 247,220 and 0 shares of common stock subject to
repurchase at December 31, 1999 and 2000, respectively.
Notes receivable from stockholders
In March 1998, the Company issued 5,333,332 shares of common stock to an
officer of the Company in exchange for a $240,000 note receivable. The note
bore interest at 6% per year. The note was collateralized by the underlying
stock and was classified as a note receivable from stockholder. Under the terms
of the agreement, the Company has the right to repurchase all of the shares of
such stock at the original issue price upon termination. The repurchase rights
expire ratably over a 48 month period with 2,888,884 and 1,555,555 shares of
common stock subject to repurchase at December 31, 1999 and 2000, respectively.
In June 1999, the note was repaid in full.
In April 1999 the Company issued a total of 2,066,668 shares of common stock
to two officers of the Company in exchange for notes receivable totalling
$201,500. The notes bear interest at the rate of 6% per year. The principal sum
of the notes became due and payable in eighteen equal monthly installments
beginning in October 2000. The notes are collateralized by the underlying stock
and are classified as notes receivable from stockholders in the accompanying
balance sheet at December 31, 2000. Under the terms of the agreement, the
Company has the right to repurchase all of the shares of such stock at the
original issue price upon termination. The repurchase rights expired as to 25%
of such common stock in April 2000, and the remainder will expire ratably over
a 36 month period thereafter with 2,066,668 and 308,333 shares of common stock
subject to repurchase at December 31, 1999 and 2000, respectively.
Note 8--Employee Stock Option Plan:
Prior Stock Option Plans
The Company's 1996 Stock Option Plan and 1998 Stock Option Plan provide for
the issuance of options to acquire 15,066,664 shares of common stock. These
plans provide for the grant of incentive stock options to employees and
nonqualified stock options to employees, directors and other eligible
participants. Options granted under these plans vest at variable rates,
typically four years, determined by the Board of Directors and remain
exercisable for a period not to exceed ten years. All of the shares of common
stock that were available for issuance under the plans when the 1999 Equity
Incentive Plan became effective, became available for issuance under the 1999
Equity Incentive Plan.
1999 Equity Incentive Plan
In September 1999, the Company adopted and stockholders approved the 1999
Equity Incentive Plan and reserved 11,600,000 shares of common stock for
issuance thereunder. The 1999 Equity Incentive Plan authorized the award of
options, restricted stock awards and stock bonuses. No person will be eligible
to receive more than 1,000,000 shares in any calendar year pursuant to awards
under this plan other than a new employee who will be eligible to receive no
more than 1,500,000 shares in the calendar year in which such employee
commences employment. Options granted under this plan may be either incentive
stock options ("ISO") or nonqualified stock options ("NSO"). ISOs may be
granted only to Company employees (including officers and directors who are
also employees). NSOs may be granted to Company employees, officers, directors,
consultants, independent contractors and advisors of the Company.
Options under the 1999 Equity Incentive Plan may be granted for periods of
up to ten years and at prices no less than 85% of the estimated fair value of
the shares on the date of grant as determined by the Board of Directors,
provided, however, that (i) the exercise price of an ISO may not be less than
100% of the estimated
62
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fair value of the shares on the date of grant, and (ii) the exercise price of
an ISO granted to a 10% stockholder may not be less than 110% of the estimated
fair value of the shares on the date of grant. The maximum term of options
granted under the 1999 Equity Incentive Plan is ten years.
Members of the Board who are not employees of the Company, or any parent,
subsidiary or affiliate of the Company, are eligible to participate in the 1999
Equity Incentive Plan. The option grants under this plan are automatic and
nondiscretionary, and the exercise price of the options must be 100% of the
fair market value of the common stock on the date of grant. Each eligible
director will initially be granted an option to purchase 20,000 shares on the
date such director first becomes a director. Immediately following each annual
meeting of the Company's stockholders, each eligible director will
automatically be granted an additional option to purchase 10,000 shares if such
director has served continuously as a member of the Board since the date of
such director's Initial Grant or, if such director was ineligible to receive an
initial grant. The term of such options is ten years, provided that they will
terminate three months following the date the director ceases to be a director
or a consultant of the Company (12 months if the termination is due to death or
disability). All options granted under the 1999 Equity Incentive Plan will vest
100% of the shares upon the date of issuance.
Plan Activity
The following table summarizes the activity under the Company's stock option
plans for the years ended December 31, 1998, 1999 and 2000 (shares in
thousands):
Year Ended December 31,
--------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning
of year................ 5,104 $0.03 2,488 $0.04 6,192 $ 9.89
Granted................. 3,296 0.05 10,348 6.11 27,130 20.96
Canceled................ (1,336) 0.05 (1,056) 0.36 (1,040) 1.99
Exercised............... (4,576) 0.03 (5,588) 0.30 (1,016) 25.15
------ ------ ------
Outstanding at end of
year................... 2,488 $0.04 6,192 $9.89 31,266 $19.27
====== ====== ======
Options exercisable at
end of year............ 2,488 6,192 4,960
====== ====== ======
Weighted average fair
value of options
granted during the
year................... $0.01 $9.89 $13.29
===== ===== ======
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2000:
Options Outstanding at December 31, Options Exercisable at
2000 December 31, 2000
--------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
- --------------- ----------- ------------ -------------- ----------- --------------
$ 0.008-
$12.34 11,722,080 9.00 $ 8.55 4,555,540 $ 2.53
$ 12.56-
$24.09 10,244,178 9.63 $19.59 55.378 $17.58
$ 25.84-
$40.65 9,089,920 9.35 $32.38 349,177 $30.04
$ 41.97-
$49.73 160,270 9.78 $41.08 270 $49.73
---------- ---------
$ 0.008-
$49.73 31,266,448 9.31 $19.27 4,960,365 $ 4.84
========== =========
63
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shares reserved for future issuance under the Company's stock option plans
were 5,514,156 as of December 31, 2000.
Employee Stock Purchase Plan
In September 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("ESPP") and reserved 2,700,000 shares of common stock for issuance thereunder.
On each January 1, the aggregate number of shares reserved for issuance under
this plan will increase automatically by a number of shares equal to 1% of the
Company's outstanding shares on December 31 of the preceding year. The
aggregate number of shares reserved for issuance under this plan shall not
exceed 12,000,000 shares. Employees generally will be eligible to participate
in this plan if they are customarily employed by the Company for more than 20
hours per week and more than five months in a calendar year and are not (and
would not become as a result of being granted an option under this plan) 5%
stockholders of the Company. Under this plan, eligible employees may select a
rate of payroll deduction between 2% and 10% of their W-2 cash compensation
subject to certain maximum purchase limitations. Each offering period will have
a maximum duration of two years and consists of four six-month purchase
periods. Offering periods and purchase periods thereafter will begin on May 1
and November 1. The price at which the common stock is purchased under the 1999
Employee Stock Purchase Plan is 85% of the lesser of the fair market value of
the Company's common stock on the first day of the applicable offering period
or on the last day of that purchase period. This plan will terminate after a
period of ten years unless terminated earlier as permitted by the Purchase
Plan. The weighted average fair value of stock purchase shares for the years
ended December 31, 1999 and 2000 were $1.67 and $3.60 respectively.
Fair value disclosures
The Company calculated the minimum fair value of each option grant and stock
purchase right on the date of grant using the Black-Scholes option-pricing
model as prescribed by SFAS No. 123 using the following assumptions:
Year Ended
December 31,
----------------
1998 1999 2000
---- ---- ----
Risk-free interest rates................................. 6.5% 5.5% 6.0%
Expected lives (in years)--Options ...................... 4.0 4.0 4.0
Expected lives (in years)--ESPP.......................... N/A 0.5 0.5
Dividend yield........................................... 0.0 0.0 0.0
Expected volatility...................................... 0.0 80.0% 90.0%
For the years ended December 31, 1998, 1999 and 2000 the Company's net loss
and net loss per share would have been as follows (in thousands, except per
share data):
1998 1999 2000
------- -------- ---------
Pro forma net income (loss):
As reported.............................. $(7,509) $(28,882) $ (32,055)
Pro forma giving effect to SFAS No. 123.. $(7,509) $(29,739) $(111,034)
Basic and Diluted pro forma net income
(loss) per share:
As reported.............................. $ (0.71) $ (0.95) $ (0.35)
Pro forma giving effect to SFAS No. 123.. $ (0.71) $ (0.98) $ (1.21)
Deferred stock-based compensation
In connection with stock options granted and assumed through acquisitions
during the years ended December 31, 1998, 1999 and 2000, the Company recorded
deferred stock-based compensation totaling $1.9 million, $7.3 million and $30.4
million, respectively, which is being amortized over the vesting periods of the
applicable options. Amortization expense recognized during the year ended
December 31, 1998, 1999 and 2000 totaled approximately $812,000, $3.7 million
and $7.5 million, respectively.
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